The Bank's push to ease credit

 
Sir Mervyn King, governor of the Bank of England Bank of England governor Sir Mervyn King makes his Mansion House speech on Thursday

The UK is depending, almost entirely, on monetary policy to pull the economy out of the doldrums. And right now, it doesn't seem to be enough.

You can expect Sir Mervyn King to admit this basic reality in his speech at the Mansion House later on Thursday. What will be most interesting to the financial markets will be what he and the chancellor plan to do about it.

Whatever you think about the government's fiscal policies, or the Bank of England's policy of quantitative easing, they have not produced much economic growth in the past two years. Indeed, the economy may still now be shrinking.

Perhaps economic stagnation (or worse) is an inevitable consequence of the 2008 financial crisis and - increasingly - events in the eurozone. It could be that the financial uncertainty created by the troubles of Greece and others is just too great for UK policymakers to offset.

Or perhaps, to produce growth, the government will, in the end, have to take another look at its budget deficit targets and reach for a bona fide Plan B.

But, before we get to any of that, the Bank and the Treasury are going to have one last go with the policy framework they already have.

That is the clear message I expect to hear from the governor of the Bank of England and the chancellor - quietly signalled in a speech earlier this week by deputy governor Paul Tucker.

What is most worrying the Bank, in the current climate, is the rise in the spread between the very low bank rate it has set to spur growth and the much higher interest rates that banks are charging to lend to companies and households.

In the wake of this kind of crisis, you would expect that gap to be wider than in normal times, but lately it has been not just large, but getting bigger - mortgage rates, for example, have been going up. This despite the fact that the economy has slipped back into recession.

In effect, that widening spread means that monetary conditions have tightened and lending across the economy has been flat, despite the Bank's efforts to keep policy as loose as possible.

There are two possible explanations for this tightening: lenders and borrowers are feeling exceptionally risk-averse, or regulators are forcing banks to be too cautious in building up capital and liquidity for a rainy day.

Probably, the explanation is a mixture of both. But Mr Tucker signalled clearly in his speech that the Bank (presumably in conjunction with the Treasury) wanted to do more to ease credit, and certainly wanted to make sure that regulator pressure wasn't forcing banks to be too conservative.

Here's the key sentence on credit: "Given the costs to our economy, the authorities, including the Bank, need to consider what more we could do to alleviate tight credit conditions in the UK."

What form would this easing take? We will hear more on that from the governor later on Thursday. But Mr Tucker did draw a clear distinction in his speech between bank capital and bank liquidity.

Banks have been battening down the hatches when it comes to capital, Mr Tucker noted, partly because UK regulators had urged them to, but also because the eurozone crisis had made the world a rather scary place.

If and when the crisis eases, Mr Tucker said you would hope and expect that banks would not feel the need for such a security blanket, but that time had not arrived yet.

So, no big move on capital. Thanks to the eurozone crisis, the Bank of England thinks commercial banks probably need all the capital they can get.

But Mr Tucker suggested that efforts by banks to build up liquidity - cash, or nearly-cash to fill short-term borrowing needs - were less welcome.

In effect, these efforts had diluted the effect of quantitative easing, by increasing the chance that the extra cash the Bank had injected into the system would sit idle on bank balance sheets instead of being re-lent.

He said the Bank should be working against this, by assuring banks that in these stressful times, they would always be able to get liquidity from the Bank of England itself. Here are the key lines from the speech on this:

"Central banks need to stand ready to provide liquidity to see the banking system through stressed conditions - without strings attached when the source of the stress is beyond banks' control. Accessing such facilities is perfectly normal.

"There is less of a case for regulators to require banks to rebuild their stock of liquid assets in current conditions. ... So far as possible, we should see whether we can liberate this part of their balance sheet in these stressed times. Whether we can do so may turn on whether the binding constraint comes from regulation or from the market."

This is a shift from the Bank's previous public position, because the governor had previously suggested that liquidity from the Bank should indeed come with "strings attached" in the form of a relatively high interest rate.

It will be interesting to hear what Sir Mervyn has to say about this. In the meantime, the message coming from Threadneedle Street is that they're going to give Plan A everything they can.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 134.

    What a convenient scapegoat EZ makes! Commercial banks probably need all capital they can get. Did they need an excuse? CBs need to stand ready to provide liquidity.
    Are you kidding me?
    The only thing the banks need is auditing, potential legal action, & really stiff regulation.
    Why is this not being done?
    The people we elected are weak-kneed & need political contributions.

  • rate this
    0

    Comment number 133.

    without strings attached when the source of the stress is beyond banks' control

    scary

  • rate this
    0

    Comment number 132.

    It seems to me that banks have an agenda - to get rich while making worker bees out of the rest of us. Banks need a security blanket. Please!
    They need a good cleaning up re toxic debt; they need regulation so tight they can barely breathe, & they need compassion for the workers.
    Don't ever count on the latter.

  • rate this
    0

    Comment number 131.

    Q. "Given the costs to our economy, the authorities, including the Bank, need to consider what more we could do to alleviate tight credit conditions in the UK."
    A. Get the banks to fix the problem(s) they created, let them write-down worthless derivatives & their wicked offshoots, buy ear-plugs because the weeping & the wailing will be awful.

  • rate this
    0

    Comment number 130.

    The banks are not our friends; they are the enemy. They have more power than anyone or anything; I honestly believe politicians are afraid of them.
    There are two possible explanations for credit tightening; no, actually there are 3. The third being, banks absorb Q,E, & bailouts like sponges - to fix toxic debt on balance sheets & then give themselves bonuses for doing so.

  • rate this
    0

    Comment number 129.

    There was no Plan A, nor can there be a Plan B.
    Why?
    Because banks run the US & the UK - not the politicians that we elected.
    Can you not YET see the usury: spread between very low bank rate to spur growth & much higher interest rates that banks are charging companies & households.

  • rate this
    -1

    Comment number 128.

    Economic stagnation was NOT inevitable consequence 2008 or events in EZ. 2008 financial events resulted from introduction of nefarious banking tool called "derivatives" - without regulation. Like cancer they spread. Derivatives now exceed total global GDP - several times over. We need someone with guts to face them down and tell them: "Clean it up or face audit & potential criminal action."

  • rate this
    0

    Comment number 127.

    UK is depending on monetary policy to pull the economy out of the mud. Well, God bless the taxpayers!
    What Mervin George plans to do about it is same-old, same-old. It's called bailout, Q.E.
    This is crazy: Do the same thing over & over and fail, you should stop before you really mortally wound your economy.

  • rate this
    0

    Comment number 126.

    "to giving it all to banks cream off the top "

    You have a point.

    "Nobody has learnt any lessons from the failed bailout culture of the past four years. No bank is being allowed to go bust. Bad debt is not being written off, it is being transferred from the private sector to the public sector. This is madness:"

    AH

  • rate this
    0

    Comment number 125.

    122 fallingTP

    'Govt are appalling at investing money'

    Agreed, but I prefer that to giving it all to banks cream off the top and fail to invest the rest in anyting better than another property bubble.

  • rate this
    0

    Comment number 124.

    re#109&117

    Do not be deceived by that FRB stuff. There is a good reason why that debt pay off will not happen: the bulk of the voting population, beyond a mortgage, have no debt.

    Paying lots more money to give those who perhaps have played fast & loose with borrowed money to give them a fresh start is a definite No-NO. Do not live in cloud cuckoo land a moment longer!

  • rate this
    0

    Comment number 123.

    121 fallingTP and MODERATORS

    JC @114 looks like another case of a contributor struggling to squeeze their thoughts into less than 400 characters and remain comprehensible.

    Worse still is when the truncation leads people into pointless fights.

    I'd much prefer to be limited to one contribution of say 1600 characters every one or two hours, rather than 400 every few minutes.

    0 characters remainin

  • rate this
    0

    Comment number 122.

    I'll write that again.

    114 Could you provide clarification on words that have been capitalised and those that haven't. Interested to know what lies behind the selectivity

    119. Govt are appalling at investing money. Botched projects, waste etc. Public ownership & govt intervention are sure mechanism to decline.

  • rate this
    0

    Comment number 121.

    114 Could you provide clarification on words theat have been capatlised an those that haven't. Inetersted to know what lies behind the selectivity.

  • rate this
    0

    Comment number 120.

    119.WolfiePeters
    It does make sense to buy or invest during a depression when prices are low, ..//..
    ~ ~ ~
    That's the problem. Prices are high. And still going up.

  • rate this
    0

    Comment number 119.

    It does make sense to buy or invest during a depression when prices are low, but who is secure enough to do that? Possibly Shell, BP, Vodafone... The certain answer is UKgov. They can re-equip with UK products, invest in new industries & education. And in the process get money into the SMEs.

    In the meantime, Sir Mervyn the magician, print off another £ 5B to pay the April trade gap.

  • rate this
    0

    Comment number 118.

    In other words the banks will be allowed and subsidised to do 'business as usual'.

  • rate this
    0

    Comment number 117.

    Governments paying interest to private banks on lent money that never existed see the film suggested in comment 109. All will become clear.

  • rate this
    0

    Comment number 116.

    No one mentions the rain. a lot of outside work planned for june can't be done. People shop less. Nothing we can do about it, but it will pass eventually. I think the eurozone effect is overstated.

  • rate this
    0

    Comment number 115.

    @113
    It would be foolish to say we can learn nothing from 1920's crash & early '30's depression but world & its various economies are now very different to then. It would be equally foolish to base policy, as EdB does, on the 1930's in a global, technology driven, full participant world economy.

    In addition, EdB cannot see past consumerism & Evan Davis tackled him on that. Ed would not answer.

 

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