Loans For Businesses
At last, the Governments is showing some urgency in deciding how to unblock bank lending to businesses. The £20bn loan scheme unveiled by Business Secretary Lord Mandelson is unlikely to do all that the Government claims for it - and the Tories may be right that their own plan for a £50bn loan scheme is a bigger and better-value version of what ministers intend.
But with a third of all small businesses reported to be struggling to get credit, the situation is urgent. A jump-start is needed and a modest start now is better than a grand plan that takes even longer to launch.
Under the terms of the plan - aimed at businesses turning over less than £500m - the Government will pledge £10bn of taxpayers’ money to underwrite loans. The money will attract a further £10bn of lending from banks, who will share the risk 50:50 with the Government. Since the banks will decide who qualifies for the loans, ministers will not find themselves in the tricky position of having to pick winners.
The scheme is a useful contribution but it won’t fix the problem. The £20bn is small beer in the context of the vast quantities of credit that have been removed from the economy as a whole, and ministers have no control over whether banks simultaneously cut their lending to households or big businesses.
This scheme will certainly release capital, but some of it may just be sat on. If the Government wants the banks to lend more, it will have to do more.
Some observers, including the Lib Dem Treasury Spokesman Vince Cable, prefer the stick: the Government should simply demand more lending from the banks in which it holds a majority stake. But that is to assume a degree of health that may be lacking.
Indeed, there appears to be a deep concern among the financial authorities that the banking sector is heading towards a fresh crisis and that a big policy response is needed. US Fed chief Ben Bernanke hinted as much in his speech at the London School of Economics.
The most radical suggestion being considered is the establishment of a bad bank that would buy up the nastiest and most illiquid assets and cleanse the banks’ balance sheets. It would be controversial and difficult to hammer out, but, short of full-scale nationalisation, it is the best shot we have of ensuring that Britain’s banks emerge from this crisis and start lending again.