UK unveils “funding for lending”

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Britain gave details on Friday of its new scheme to get banks to lend, with some 80 billion pounds ($123 billion) of cheap loans available provided they go to households and businesses.

Part of efforts to lift the economy out of recession, the “funding for lending” plan was jointly announced by finance minister George Osborne and Bank of England Governor Mervyn King last month.

Previous schemes to spur lending since the financial crisis have failed to give a clear boost to the economy, putting pressure on the BoE and the Conservative-led coalition government, which have been quick to blame much of the country's economic woes on the neighbouring euro zone debt crisis.

Osborne and the Bank of England insist this scheme will be different, as it ties banks' access to the scheme and cost of using it directly to whether they raise total lending to British firms and households.

“”The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy - showing that we are not powerless to act in the face of the euro zone debt storm,” Osborne said.

Britain's top banks fell short of their government targets to lend to small businesses last year and not all economists are convinced that the scheme will lead to a pick up in lending or that individuals and businesses have the appetite to borrow.

“The economic outlook is currently both worrying and highly uncertain, so banks may still be reluctant to lend to many companies and households whatever the cost of their funding because of the perceived risks involved,” said Howard Archer of IHS Global Insight.

Britain's economy entered its second recession in four years in late 2011, and government spending cuts as well as the euro zone debt crisis are weighing on growth.

Earlier this week King said the economy was not showing much signs of impending recovery, and the director-general of the Confederation of British Industry said the government's implementation of growth policies had been “disappointing”.

Labour finance spokesman Chris Leslie said the government had not gone far enough and that there needed to be a relaxation of Britain's harsh austerity measures.

“To address the biggest problems in our economy - a lack of confidence and a lack of demand - we need a change of course from the government on tax rises and spending cuts which go too far and too fast,” Leslie said.

The new initiative could help make loans more available to first-time home-buyers and to small businesses - two groups which have found it particularly hard to borrow from banks.

Philip Monks, chief executive of Aldermore, a recently established bank that lends to small businesses and provides residential mortgages, said the latest initiative had more chance of succeeding than previous stimulus measures.

“Crucially, it appears to be anchored around net new lending figures by incentivising banks to lend more if they want access to a lower cost of funds,” he said. “The (scheme) should be a key plank in ensuring a greater flow of lending to small businesses and homeowners right across the country.”

The scheme follows the BoE's decision last week to restart its quantitative easing programme, which involves buying government bonds with newly created money - which mainly benefits those companies large enough to bypass banks and raise money direct from capital banks.

BORROWING FROM BOE

Under the new scheme, banks and building societies will initially be able to borrow up to 5 percent of their stock of existing lending from the BoE - a sum of around 80 billion pounds.

They will be charged a 0.25 percent annual fee for this, but they have to commit to keeping lending steady. If they cut lending, they have to more, up to 1.5 percent on a sliding scale.

The BoE believes that total outstanding lending in Britain would be at risk of falling without the scheme - especially as some government-run banks such as major lenders Lloyds and RBS must sell assets to comply with state aid rules.

Some categories of lending - such as that to small businesses - already show marked year-on-year declines.

New entrants into Britain's retail banking sector, such as Metro Bank, Virgin Money and Aldermore have emerged since the 2008 financial crisis looking to fill the gap created by big players deleveraging and shrinking their balance sheets.

Banks that increase total lending will be able to borrow more from the BoE scheme. They access funds by swapping collateral on their books for Treasury bills from the BoE, increasing liquid assets which then support lending.

“We'll study the scheme in detail but believe it will be of benefit to banks, businesses and consumers as improved liquidity flows through to increased lending,” said Santander UK.

The British Bankers Association, which has defended the industry's commitment to lending, said the new scheme should help “insulate new borrowers against the worst effects of the eurozone crisis”.

“Banks want to lend to viable businesses and individuals - and they want to encourage those requiring finance to come forward,” the BBA said.

The BoE said that as of March, banks had registered around 265 billion pounds of collateral with it for use in other schemes, which would also be eligible for the new scheme.

Banks have 18 months, starting on Aug. 1, to draw down funding from the BoE, which will then last for four years. - Reuters


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