Bank shares jump on new business support plans

 

Mervyn King: ''The other effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over our economy too''

Bank shares jumped on Friday in the wake of plans from the Bank of England to launch two new stimulus packages.

The Bank of England's announcement on Thursday came in response to the worsening economic outlook, governor Sir Mervyn King said.

Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies.

Royal Bank of Scotland was the biggest riser, up nearly 8%. Lloyds rose 5.2% and Barclays 4.2%.

Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence".

But Labour's shadow chancellor Ed Balls said the measure would not be enough to help without the Government also changing course on its austerity plans.

In his annual Mansion House speech, Chancellor George Osborne said the stimulus packages would "support the flow of credit to where it is needed in the real economy".

"We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he said.

'Ugly picture'

Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen.

Start Quote

[The Bank of England is saying] if banks are hoarding cash because they fear that any minute now the eurozone crisis will become so terrible that they won't be able to borrow what they need from normal creditors, they can relax, stop hoarding and start lending again”

End Quote

Rob Lee, small business owner: "That money has got to get back to small businesses"

The crisis had also created a "large black cloud of uncertainty" over the global economy, meaning companies and households were cutting back on spending.

Signs of a slowdown in China, India and other "previously buoyant emerging economies" added to the "ugly picture" and meant further action was needed, the governor said.

The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets.

However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE.

Separately, a Bank of England survey found that the risk of a foreign government failing to repay its loans, or a recession, were still, by a wide margin, the top concerns of senior City executives.

The bank's half-yearly "systemic risk survey", of 73 banks, building societies, insurers and other financial institutions, found that these were still identified as the the two top risks to the health of the UK financial system.

Analysis

It may not be Plan B - but Plan A is undergoing some fairly significant remedial work.

In the wake of the billions poured into the economy through Quantitative Easing and Credit Easing, we now have two new schemes designed to pump yet more cash into UK plc.

It underlines just how alarmed ministers have become over the unfolding eurozone crisis.

What has added to the concern is the pace at which the crisis now appears to be unfolding.

One Treasury minister noted that on Monday morning, everyone was relatively upbeat following the emergency bailout for Spanish banks. By Monday evening, everyone had been plunged into gloom once more after the markets gave the latest deal the thumbs down.

The Treasury view is that there is now a dangerous mismatch between the pace at which the markets are moving and the arthritic response of eurozone leaders.

The big fear? That not only does a eurozone meltdown risk snuffing out any UK recovery, but it risks consigning the British economy to years in the economic doldrums.

Cheap loans

Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending.

"Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said.

Sir Mervyn added that the 'funding for lending' scheme would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending.

But Mr Balls told the BBC that the measure won't work - because Mr Osborne's approach to the economy had been flawed from the beginning: "If you fundamentally think that the reason why our economy is stalled is simply because of the supply of credit to banks you might think you could sort this with monetary policy.

"The reason it's happened in Britain so much harder than other countries is because of the fiscal crunch the chancellor imposed on the economy two years ago, which has choked off our recovery before the eurozone crisis."

The move was not wholly embraced by business.

Graeme Leach, the chief economist at the Institute of Directors, said: "The extended liquidity and funding for lending schemes are welcome, but limited.

CASE STUDY

Ian Roos

Ian Roos, owner of Scarlett Fuel Solutions, Colchester, Essex

We're a small growing business which cleans out contaminated fuel, for instance from petrol stations, airports, power generators. We've been going for 11 months, trading for six months and we've nine employees. We couldn't get any affordable funding from the banks so we had to turn to Wonga, the payday lender. We borrowed £8,000 over 16 weeks. We'll pay back £9,400. If you work out the APR, it's something like 1,600%, but you can't look at it based on the APR because you only have it for a few weeks, you only pay the interest on the capital for those few weeks.

In principle, it [the government initiative] sounds fantastic; in practice, I'm far more pessimistic about it. The amount of money being offered, considering the number of small businesses there are, is really, really small. And the reality is we have no clear evidence that it will filter down to us. Previous schemes haven't. Banks were not willing to take the risk to invest in us and I can't see this changing that. I've not met one bank manager who's said, "Well, I'll help you get that government guarantee."

Bank lending plan: How will it work?

"The liquidity scheme will need to be massively expanded if break-up and contagion spread across the eurozone... But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."

Peter Hann, banking expert at the Cass Business School, said the measures would have been better applied shortly after the banking crash of 2008, adding that "right now, in a time of weakening confidence, changing confidence is not going to happen just by easing money".

The BBC's business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%.

The governor said he hoped the scheme would be in place "within weeks".

Banking sector liquidity

The second measure he said the Bank would be introducing was a scheme outlined in December last year - called the Extended Collateral Term Repo Facility - to address a shortage of liquidity in the banking sector.

This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash.

Further details of the short-term liquidity scheme would be announced on Friday, he said.

Conservative MP Andrew Tyrie, chairman of the Commons Treasury Select Committee, said the plans looked encouraging: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks."

 

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  • rate this
    +6

    Comment number 1253.

    You *cannot* get out of debt by borrowing more money. The only way that could work, would be if you lent it on at a higher interest rate than you were paying on it (unrealistic) -- and nobody defaulted (even more so).

    You also cannot keep selling more product once everybody who wants one has already got one.

    We have to get used to a zero-growth future.

  • rate this
    +29

    Comment number 1008.

    Round and round in ever decreasing circles until someone realises that increasing GDP based upon more debt just makes the return to real money and real wealth creation more difficult. It's like the alcoholic that promises he will give up after just one more drink.

  • rate this
    +33

    Comment number 867.

    Giving money to the poor would be a quicker way to get the economy moving. They spend more and save less than the well off. Unless the banks actually lend this money out, it will achieve very little. And how about some proper government spending on infrastructure. Like building social housing (not to be sold off) - or renovating schools? Forget PPI !

  • rate this
    +5

    Comment number 645.

    A better way to get money into the system than QE (as intra bank lending seems to be non-existent). What it does not & cannot address is the lack of international markets to stimulate business growth! The Tories strategy seems predicated on international market recovery as the UK cannot afford a public spending strategy - for which I would ask Balls the question: why did you spend all our money!

  • rate this
    -35

    Comment number 644.

    This is money banks would have to repay just they can borrow at favourable rates . From a businessmans point of view its a step in the right direction provided it filters down to businesses . As regards austerity , it has to continue but with concessions elsewhere to help the economy . As for the top comment here , i will say , you dont speak for everybody !

 

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