King opposes 'public mortgage bank'

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Mr King said launching a public sector mortgage bank or providing Government-backed loans would "severely undercut" incentives for banks to get their balance sheets back in order following the excessive lending of recent years.

He said: "Banks point out that their balance sheets will take some time to adjust. That won't happen unless they have incentives to do that."

His comments, made to the Treasury Select Committee, came after the US Government was forced to effectively nationalise two of America's biggest mortgage firms, Fannie Mae and Freddie Mac.

The firms, which account for nearly half of the outstanding mortgages in the US, have lost billions of dollars during the housing crash and were deemed by policymakers to pose an "unacceptable risk" to the economy.

Mr King said: "If the Government were to guarantee mortgages...or set up a public sector mortgage bank to provide mortgages directly...what that would do is totally undercut the incentives private sector banks had to get their own balance sheets in order."

The lack of mortgages in the wake of the credit crunch has sent the housing market into a tailspin, with a damaging knock-on effect on the wider economy.

Bank of England figures last week showed just 33,000 mortgages were approved for house purchase during July - a record low and barely a quarter of the 114,000 approved 12 months earlier.

Next week the Bank publishes proposals on a permanent successor to its current Special Liquidity Scheme (SLS) - which allows banks to shore up their balance sheets by swapping riskier assets for safer Treasury bonds.

The SLS closes on October 21, and has already had "significant" uptake, Mr King said. Reports have put the amount as high as £200 billion.