Darling urges action on mortgages - but no proposals yet

Alistair Darling today called on banks to recent cuts in the UK's bank base rate to mortgage borrowers. Speaking in Washington, where the Chancellor is attending an international summit of finance ministers, he called for banks to do "everything possible" to help borrowers struggling with mortgage repayments, and promised that Government would play its part with "nothing ruled out". However, there is an absence of specific policy proposals at this stage.

Darling's statement comes on the heels of a warning from the Council of Mortgage Lenders that lending could be reduced by as much as 50% this year. The lack of credit available is now an urgent matter which needs to be addressed. The injections of capital from central banks, including the Bank of England, have virtually matched the scale of losses suffered by banks since the financial crisis surfaced at approximately £420 billion. Yet these funds are simply not being passed on by banks to households. Instead, banks are now hoarding these cheap funds. Banks are also now hiking up their lending rates to those remaining households that they consider good risks in order to recoup some of their losses.

Two specific policies need to be adopted to ensure households are helped to manage the impacts from this crisis going forwards.

• Firstly, any further access to cheap funds from the Bank of England must be made contingent on the submission of a satisfactory plan to improve access to affordable credit for households. Specific conditions should be attached to Bank of England funds which could include requirement for banks to inject the funds into the mortgage market or that they be used to support households needing to reschedule their existing commitments. Critically, conditions must be placed on banks to limit the cost of future mortgages and loans and that limits be clearly linked to the Bank of England base rates (expressed as bank base rate + x%).

• Secondly, Government, the Bank of England, and the FSA should develop a joint plan for ensuring access to affordable credit in the UK. Changes should be made to the licensing conditions for banks so that they are required to demonstrate how their bank serves the needs of low income households and how it is contributing to the overall target. Banks should be publicly rated on their achievement and the regulator empowered to take action where performance is unsatisfactory.