News

June 22, 2012

Muted reaction to new credit-easing strategy

Business groups have given the Government’s latest credit-easing scheme a lukewarm reception. The “funding for lending” scheme unveiled by the Chancellor of the Exchequer George Osborne and Bank of England Governor, Sir Mervyn King, is intended to encourage the UK’s banks to lend to small businesses and could support up to £80bn of new loans.

Under the new scheme, dubbed “plan B” by some, high street banks will be able to temporarily swap assets, such as mortgage books, with the Bank of England, in return for cash that can be used to offer new loans to customers including small firms. In addition, an emergency liquidity scheme will run for six months to make £5bn available to banks each month so that they can provide credit to SMEs.

However, business groups including the Institute of Directors (IoD), the British Chambers of Commerce (BCC) and the Forum of Private Businesses (FPB) have all expressed their concerns about the new scheme.

Phil Orford, chief executive of the FPB, said: “The fact is that the banks have consistently failed to lend fairly since the crisis began, despite a number of state initiatives. Here we have another credit easing scheme, albeit on a much grander scale, to get the banks splashing the cash. But no matter what lending schemes are put in place, nothing will imbue confidence here more than the eurozone sorting itself out.”

Graeme Leach, chief economist at the Institute of Directors, said: "The extended liquidity and funding for lending schemes are welcome, but limited. The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing. But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."

John Longworth, director general of the British Chambers of Commerce, said: “Measures to underpin the financial system by improving liquidity, and boosting lending to businesses and consumers, are crucial. However, too many question marks remain over how the two new schemes will work. How, for example, will the Funding for Lending scheme be set up and monitored so that it does in fact deliver money to the real economy? Without more detail, followed by swift implementation, the future success of these schemes is still unclear.”