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Funding for Lending: Osborne's latest whizz to kickstart economy Funding for Lending: Osborne's latest wheeze to kickstart economy
(40 minutes later)
Funding for Lending, the latest George Osborne-backed wheeze for kick-starting the economy, details of which were announced on Friday, is a clear sign of the rising panic at the Treasury and the Bank of England about Britain's double-dip.Funding for Lending, the latest George Osborne-backed wheeze for kick-starting the economy, details of which were announced on Friday, is a clear sign of the rising panic at the Treasury and the Bank of England about Britain's double-dip.
City analysts pointed out that the structure of the plan looked strikingly similar to the Special Liquidity Scheme that the government and the Bank used to pump cheap funding into battered banks at the height of the financial crisis – and which at the time was seen as a last-ditch emergency measure.City analysts pointed out that the structure of the plan looked strikingly similar to the Special Liquidity Scheme that the government and the Bank used to pump cheap funding into battered banks at the height of the financial crisis – and which at the time was seen as a last-ditch emergency measure.
This latest programme also follows Project Merlin, a gentlemen's agreement that imposed lending targets on the banks and was almost universally regarded as an abject failure; and Osborne's national loan guarantee scheme, which only got under way in March, and was meant to provide cheaper loans for firms, exactly the aim of the new FLS, as it will be known.This latest programme also follows Project Merlin, a gentlemen's agreement that imposed lending targets on the banks and was almost universally regarded as an abject failure; and Osborne's national loan guarantee scheme, which only got under way in March, and was meant to provide cheaper loans for firms, exactly the aim of the new FLS, as it will be known.
Amid this blizzard of cross-cutting plans and schemes, business lending has continued to plunge: the Bank of England's figures show that the stock of bank loans to the corporate sector peaked in August 2008 at £517bn, and has since fallen by £95bn, or 18%. Vince Cable, the business secretary, says that means the banks, in addition to their many other sins, are "throttling the recovery".Amid this blizzard of cross-cutting plans and schemes, business lending has continued to plunge: the Bank of England's figures show that the stock of bank loans to the corporate sector peaked in August 2008 at £517bn, and has since fallen by £95bn, or 18%. Vince Cable, the business secretary, says that means the banks, in addition to their many other sins, are "throttling the recovery".
From that perspective, and especially with the eurozone crisis still far from over, ensuring a cheap line of funding for banks – which will be able to swap chunks of their loan portfolio for safe, liquid Treasury bills – looks like a sensible insurance measure.From that perspective, and especially with the eurozone crisis still far from over, ensuring a cheap line of funding for banks – which will be able to swap chunks of their loan portfolio for safe, liquid Treasury bills – looks like a sensible insurance measure.
And some firms that have been dissuaded from borrowing by the price of a loan may find they can now borrow more affordably.And some firms that have been dissuaded from borrowing by the price of a loan may find they can now borrow more affordably.
But there are two major risks. The first is that banks will find a way of gaming the system – pocketing the cheap funding, and failing to pass on the benefits to their customers.But there are two major risks. The first is that banks will find a way of gaming the system – pocketing the cheap funding, and failing to pass on the benefits to their customers.
Bank of England officials appear to have worked hard in designing the scheme to give banks every incentive to boost lending – by charging them a higher interest rate if their loan book shrinks, for example. But banks have an impressive record for finding a loophole.Bank of England officials appear to have worked hard in designing the scheme to give banks every incentive to boost lending – by charging them a higher interest rate if their loan book shrinks, for example. But banks have an impressive record for finding a loophole.
Secondly, there's the much debated question of whether it's really a lack of affordable loans that's "throttling" the recovery; or the fact that shell-shocked firms and families whose balance sheets were shot full of holes by the recession don't want to take on any more borrowing.Secondly, there's the much debated question of whether it's really a lack of affordable loans that's "throttling" the recovery; or the fact that shell-shocked firms and families whose balance sheets were shot full of holes by the recession don't want to take on any more borrowing.
If the FLS fails to halt the relentless slide in business lending, it will be painfully clear that there is far more wrong with the British economy than a few stingy banks.If the FLS fails to halt the relentless slide in business lending, it will be painfully clear that there is far more wrong with the British economy than a few stingy banks.