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Britain Offers Hand to Smaller Businesses Britain Offers Hand to Smaller Businesses
(about 5 hours later)
LONDON — With Britain’s moribund economy struggling to avert a return to recession, a government-backed lending program was extended and reworked Wednesday in the hope of freeing up borrowing to credit-starved small and medium-size companies. LONDON — With the British economy struggling to avoid lapsing back into recession, the country’s central bank took a step Wednesday to make more loans available to credit-starved small and midsize companies.
The initiative, which comes a day before official figures will show whether Britain has avoided a third extended contraction in five years, underlines concerns about the difficulty British companies still face in raising cash in the aftermath of the financial crash. The step, which comes a day before official figures will show whether Britain has avoided a third recession in five years, underlines concerns about the difficulty British companies still face in obtaining credit in the aftermath of the financial crash.
Introduced last year, the program, the Funding for Lending Scheme, allows British banks that extend credit to borrow from the Bank of England, against a wide range of collateral, at an annual interest rate as low as one-quarter of a percent. On Wednesday, the Bank of England said it would extend and revamp a program called the Funding for Lending Scheme. It allows British banks that extend credit to businesses to borrow from the central bank, using a wide range of collateral, at an annual interest rate as low as one-quarter of a percent.
Under the plans announced Wednesday, the program will be extended for a year until 2015. It will focus more on smaller businesses, and participating banks will be able to lend to alternative providers of credit like financial leasing and factoring corporations, which help small companies raise money, and to mortgage and housing credit corporations. Under the revised plan, the program will be extended for a year until 2015 and will focus more on smaller businesses. Participating banks will be able to lend to alternative providers of credit, like financial leasing and factoring corporations, which help small companies raise money, and to mortgage and housing credit corporations.
Since its inception last August, the program has had mixed results, and the Bank of England concedes that an improvement in credit conditions has been less marked for smaller businesses than for larger businesses and households. Since the program’s inception last August, its results have been inconclusive. The Bank of England concedes that an improvement in credit conditions has been less marked for smaller businesses than for larger businesses and households.
The central bank said last month that in the fourth quarter of last year, 11 financial institutions made total drawdowns of £9.5 billion, or $14.5 billion, under the program, taking the total amount drawn to £13.8 billion. But it said that overall net lending by participating banks was down over the quarter by £2.4 billion. The central bank said last month that in the fourth quarter of last year, 11 financial institutions made drawdowns of £9.5 billion, or $14.5 billion, under the program, taking the total amount drawn to £13.8 billion. But it said that the £1.36 trillion loan book of the 40 institutions that had signed up for the program — including those that have yet to use it — had declined over the quarter, by £2.4 billion.
The changes mean that for every £1 of additional lending by banks to small and medium-size businesses in the rest of 2013, the amount of funding that banks will be able to draw upon increases by £10. The changes mean that for every additional pound that banks lend to small and midsize businesses in the rest of 2013, the amount of funding that the banks will be able to draw upon increases by £10.
“The Bank of England and Treasury are throwing the kitchen sink at the problem,” said Rob Wood, chief economist for Britain at Berenberg Bank in London. He added that as well as helping small businesses, the move may lift the British housing market. “The Bank of England and Treasury are throwing the kitchen sink at the problem,” said Rob Wood, chief economist for Britain at Berenberg Bank in London. He added that as well as helping small businesses, the move might lift the British housing market.
“Tight credit conditions have been a key factor in the holding back recovery,” he wrote in a note. “This extension should help to solve that. The terms on offer to banks are now about as generous as they could possibly be.” “Tight credit conditions have been a key factor in holding back the recovery,” he wrote in a note. “This extension should help to solve that. The terms on offer to banks are now about as generous as they could possibly be.” Mr. Wood added, however, that the move was not a silver bullet, both because of the broader economic situation and because of pressure on banks to build up their capital reserves to reduce risks in future financial crises — a pressure some banks say inhibits their lending capacity.
Mr. Wood added, however, that the move was not a silver bullet, both because of the broader economic situation and because of pressure on banks to build up their capital reserves to reduce risks in future financial crises.
“Firms are not borrowing and investing because the outlook for the economy is weak, as strong headwinds, from Euro-worries to weak household income, are keeping confidence under wraps,” he wrote. “The scheme also requires banks to want to lend more. Banks are under heavy pressure from the other arm of the BoE to raise more capital.”“Firms are not borrowing and investing because the outlook for the economy is weak, as strong headwinds, from Euro-worries to weak household income, are keeping confidence under wraps,” he wrote. “The scheme also requires banks to want to lend more. Banks are under heavy pressure from the other arm of the BoE to raise more capital.”
Mervyn A. King, governor of the Bank of England, said in a statement that an extension of the program was “valuable, as it gives banks continued assurance against the risk that market funding rates increase.” Mervyn A. King, governor of the Bank of England, said Wednesday that an extension of the program was “valuable, as it gives banks continued assurance against the risk that market funding rates increase.”
George Osborne, the chancellor of the Exchequer, described the move as a big lift for small and medium-size businesses. George Osborne, the chancellor of the Exchequer, described the step as a big lift for small and midsize businesses. “The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses,” he said. “This innovative extension will now do even more for small and medium-sized businesses so that they can play their full part in creating new jobs.”
“The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses,” he said in a statement. “This innovative extension will now do even more for small and medium-sized businesses so that they can play their full part in creating new jobs.” Mr. Osborne has faced increased criticism since the International Monetary Fund raised doubts last week about the pace of his deficit reduction strategy. Last week Fitch became the second credit ratings agency, after Moody’s, to strip Britain of its prized triple-A credit rating.
Mr. Osborne has faced increased criticism since the International Monetary Fund raised doubts last week about the pace of his deficit reduction strategy, and Fitch became the second credit ratings agency to strip Britain of its prized triple-A credit rating. First-quarter economic output data will be released on Thursday, showing whether the British economy has slipped into a triple-dip recession, as some analysts have predicted. The formal definition of a recession is at least two consecutive quarters of economic contraction.
On Thursday, first-quarter economic output data will be released, showing whether Britain’s economy has slipped into a triple-dip recession, as some analysts have predicted. Chris Leslie, Treasury spokesman for the opposition Labour Party, welcomed the step announced Wednesday but said it fell short. “Despite scheme after scheme — from the failed Project Merlin deal with the banks to credit easing and now Funding for Lending — net lending to businesses has fallen month by month under this government,” he said. Project Merlin was a lending-stimulus plan, announced in 2011, which has fallen short of its goals. He said that net lending to businesses had fallen £4.8 billion in the last three months alone.
Chris Leslie, Treasury spokesman for the opposition Labour Party, welcomed the move announced Wednesday but said it fell short.
“Despite scheme after scheme — from the failed Project Merlin deal with the banks to credit easing and now Funding for Lending — net lending to businesses has fallen month by month under this government,” he said. “Labour called for reforms to this scheme last year, so these belated changes are welcome. But with net lending to businesses down by £4.8 billion in the last three months alone, they do not go far enough.”