How real is the commitment to lend?

By Ian Pollock Personal finance reporter, BBC News

Sir Tom McKillop said references to lending in 2007 were not precise

Confusion surrounds the meaning of the government's "agreement" that some of the UK's High Street banks should restore their mortgage lending to 2007 levels.

The government is taking a 60% stake in RBS, which owns NatWest, and a 40% stake in the soon-to-be-merged Lloyds TSB/HBOS.

That is in return for an emergency bailout, worth �20bn for RBS NatWest alone, to stop any possibility that the banks might eventually go bust.

The RBS chairman, Sir Tom McKillop, told a telephone news conference he was enormously appreciative of the government's support, at what he called a "dangerous moment."

Commitment?

One of the commitments that the banks have given in return for the taxpayers' money involves: "maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels".

We are talking here about the quantity of activity Hector Sants, FSA

Back then mortgages were plentiful and cheap, recklessly so as we now know.

But to the man in the street the agreement between the banks and the government would appear to mean providing more money for home loans, to help reverse the dramatic slump in mortgage lending seen this year as a result of the credit crunch.

Indeed, a Treasury spokesman, when asked what this commitment meant, said: "They have more funds to commit to increase their lending."

Answering questions on this topic on BBC Radio 5 live, Hector Sants of the Financial Services Authority (FSA), made it clear he wanted the quantity of mortgage lending to rise from current levels.

Don't read too much into the 2007 reference as being very scientific as to precisely the market share, or precisely the volume of lending Sir Tom McKillop, chairman, RBS

"This stipulation is an encouragement to ensure that the money that is being put in by government is actually used to the benefit of all, and in order to give a framework against which we can measure that, a reference is made back to 2007 levels."

"We are talking here about the quantity of activity. The rates will still of course have to be commercial rates, as appropriate at the time that the lending is being made," he emphasised.

Interpretation

The view of RBS directors, in the telephone conference call with financial journalists, appeared to make the situation less clear.

Pointing out that that bank's share of new mortgage lending had risen from 6% in 2007 to 17% this year, Sir Tom McKillop, said: "Don't read too much into the 2007 reference as being very scientific as to precisely the market share, or precisely the volume of lending."

"I think it was a place holder for normal market conditions."

"So I'm looking to go back to our levels of activity in 2007; I would view that as a place holder for a normal level of activity - good levels of supply and good levels of demand," he added.

Sir Tom pointed out that the government had agreed with the bank that it should not indulge in reckless or uncommercial mortgage lending just to get things going again.

"In the early part of the year supply was severely choked off; people wanted mortgages and could not get them," he said

"Right about now there is more supply than there is demand, albeit the credit metrics and pricing have moved."

"We are in the market lending just now, but there isn't as much demand to take us back to 2007 levels," he added.

Understanding

Got that?

More expensive mortgages, by way of demands for higher deposits and more credit-worthiness among customers, are currently dissuading would-be borrowers from borrowing.

And under the new agreement, mortgages will not necessarily become cheaper or more plentiful, at least as far as RBS is concerned.

Asked if this was the Treasury's understanding too, the bank replied "yes".

That understanding is not widely shared, yet.

Angela Knight of the British Bankers' Association, speaking on the BBC's Working Lunch programme, took a different slant.

"One of the things that the banks have signed up to is about improving lending for mortgages and for small businesses," she said.

"That is undoubtedly something that says, to individuals, there is going to be some more lending, in future, than there has been in the past."

Some lenders though will be relieved if the RBS view of the world prevails.

"The CML doubts whether, in the current market where house prices have been falling and demand has reduced, it would be either prudent or desirable for the volume of lending to home-owners to equate to 2007 levels," said the Council of Mortgage Lenders (CML).

"The Treasury has told us it means an aspiration to achieving a broad, deep mortgage market in general with a good spread of products enabling access to the mortgage market for all credit-worthy borrowers."

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