Such asset purchases involve taking more credit risk onto the public sector balance sheet. That is why the Bank will consider purchasing only high quality assets. Despite the existence of a range of unconventional instruments, monetary policy is likely to be more effective when the banking system is working normally. So the first priority for policy is to fix the banking system so that it can resume its normal lending function. The contraction of lending to ordinary viable businesses – your businesses – is threatening to drive the economy further into recession. The package of measures announced yesterday by the Chancellor are not designed to protect the banks as such. They are designed to protect the economy from the banks. In particular, the Asset Protection Scheme aims to remove a degree of uncertainty about the future losses banks will make. It also has the effect of reducing the amount of capital banks need to hold against their risky assets. Both effects will serve to strengthen and underpin banks' balance sheets and so support their lending to the real economy. To be clear, the scheme does not mean that the taxpayer will bear the full brunt of past lending mistakes by banks. Rather, there is sharing of losses between shareholders and the government – or coinsurance – with the government providing, at a price, insurance against only extreme outcomes for the banks.
At the same time, it is common knowledge that the law has assigned most of the costs associated with granting a mortgage to the institution. Some institutions have even decided 10/15  to assume the cost of appraisal as well, which is in practice the only one that the law places upon the customer. In addition, the requirements relating to the minimum number of instalments that must be due and payable before it is possible to initiate judicial enforcement proceedings, will delay the recovery of debt outstanding on non-performing loans, which will inevitably increase the costs of the foreclosure process. This will also initially have negative effects on the overall level of non-performing mortgage loans. Clearly, banks, like any other firm, can only survive if they are profitable. Consequently institutions must be able to measure the costs and risks associated with each new transaction. I would like to stress here that, to guarantee their viability and to be able to adequately remunerate their capital, each individual institution must have an appropriate pricing policy allowing it to cover all the costs and risks associated with each loan, and must establish governance structures and management processes that ensure effective management of such risks. When assessing solvency and assigning an appropriate price to each new transaction, institutions will have to optimise the use of the information available on their customers. For this purpose they need to have technological solutions enabling such information to be appropriately collected and used efficiently subsequently.