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."

 

More on This Story

Eurozone in Crisis

The BBC is not responsible for the content of external Internet sites

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +5

    Comment number 893.

    If it was as simple as this then WHY didn't the spanish do it?

    further more, why do I feel as though SOMEONE is taking me for a fool?

    How is it that the BANKS who got us into this mess in the first place manage yet again to get off scot free?

  • rate this
    -1

    Comment number 892.

    The current Government were left with a nightmare set of public accounts by Labour - Labour, which in my view is one of the most cynical and financially harmful political parties in any OECD country. Within the highly restricted/overborrowed financial position left to it, this Government are doing what they can to keep us afloat despite Labour's torpedoes. The Government deserves our support.

  • rate this
    +1

    Comment number 891.

    Firstly, having money in the bank will at least protect them. Can anyone here imagine the consequences of a UK bank going under? Our savings might not be going anywhere but at least we've still got them.

    Secondly, can someone remind Ed Balls he was Brown's economic adviser? and remind him who was in charge when the sky caved in back in 2008?

  • rate this
    +4

    Comment number 890.

    But people and businesses when they feel times are difficult avoid borrowing,, so will the banks having more to lend do any good?
    Wouldn't it be better to invest the cash directly in infrastructure and other projects that would give jobs and improve prospects long term for all of us?

  • rate this
    +1

    Comment number 889.

    So - the Chancellor is giving taxpayers money to the banks, so that they can lend it back to us, and charge us for the privilege!!!!! The world has gone mad!!

  • rate this
    +2

    Comment number 888.

    "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."

    So does this mean the money could end up outside of the UK economy? It's a joke!

    Would be better to directly invest in a publicly owned company to invest in infrastructure and create jobs.

  • rate this
    +3

    Comment number 887.

    874. Blue Web Retail

    AH yes but the real world situation is that the banks DO NOT HAVE THE CASH

    The system is NOT built on capital any more it is built on debt THE VAST MAJORITY OF IT TOXIC DERIVATIVES

    The banks are INSOLVENT they R leveraged 2 the HILT, their hidden balance sheets show that DEBT is insured by EVEN MORE DEBT

    In short there is no grease (excuse the pun) to lubricate the wheels

  • rate this
    -1

    Comment number 886.

    The present Tory lot are all advocates of Shumpeter's Creative Destruction theory. Slash and burn then watch the green shoots of the furture rise...it's going to get very hot in here....

  • rate this
    0

    Comment number 885.

    873. couldn't agree more, lets give the money so that people can get the economy moving. See how much of this money will sit in banks so that at the end of the year the bankers can show that they have hit government targets for keeping their bank liquid, they have hit targets for lending (not their own money) and therefore deserve their millions in bonuses.

  • rate this
    +1

    Comment number 884.

    Some people are posting that this money is coming from taxpayers. Not quite..

    Its being printed/made up. It effectively devalues Sterling held by everyone, rich & poor; including our creditors (overseas banks/ sovereign wealth funds etc).

    Libertarians would argue that this is basically theft from everyone who owns our currency. Although most people answer that its needed so must be suffered.

  • rate this
    +5

    Comment number 883.

    Giving free money to banks to lend for mortgages is really unfair to savers trying to buy houses. House prices are already far too inflated and mortgage interest rates are already too cheap. People inclined to get large mortgages to buy houses may think the government is doing them a favour, but they're not, all they're doing is inflating the prices even more, making people in even more debt.

  • rate this
    +3

    Comment number 882.

    The global stresses caused by growing wealth inequality and youth economic exclusion will not be relieved until it is widely understood why fiat money created by central or private banks is no longer fit for purpose.

  • rate this
    +2

    Comment number 881.

    George Osborne is going on a 'moon-walk' again. Here is a man educated at Eton along with the other muppet, sorry Cameron, and all they can suggestto move our economy forward, is staying in 'reverse gear'

  • rate this
    +5

    Comment number 880.

    Notice how the bank shares went up but not the rest of the market. The banks just get a nice subsidy and keep the money - it doesn't help anyone else.

  • rate this
    +3

    Comment number 879.

    #845
    Even more sanctimonious than usual Susan - tell it to the poor unfortunates just setting out to buy their very own cardboard Wendy House toy garden and drive all for just 175k on wages of 20k pa.
    Estate agents and Mostyn's chum may well regard same as a delightful compact and bijou residence in an up and coming area - reality is different.

    Try dismounting and mixing with real people.

  • rate this
    +3

    Comment number 878.

    Of course bank shares go up. They've just been given yet more potloads of money.

    If the government is going to print money, how about giving it to the victims of the economic crisis, rather than its cause?

  • rate this
    +1

    Comment number 877.

    Recessions are caused by uncertainty and a lack of confidence.

    It doesn't matter how money is pumped into the banks, if people's job security is threatened they will not spend.

    The media including the BBC, are constantly reporting negatively on the economy and undermining confidence.

    Let's see some responsible reporting, especially from the highly paid and essentially recession free BBC.

  • rate this
    +1

    Comment number 876.

    Agree with Rustybadger but two extra points - this helps banks and hurts tax payers - banks were a major cause of the problem in the first place - so rich get richer by making the poor poorer, as usual.
    Give the money back to the taxpayers!
    How about some original innovative ideas to actually get the country working? Why aren't the government doing their job??? Report card: extremely POOR!

  • rate this
    +4

    Comment number 875.

    Distracted by the sleight of hand, yet?

    Good.. good, stand still while we pick your pockets even deeper.

  • rate this
    +5

    Comment number 874.

    I started an eCommerce business some 7 years ago which has now grown to a turnover of circa £1million. We started with £400 and have never taken a loan or external investment. Last year we grew 20% alone. We are now at a point where our growth is restricted down to cashflow. We could employ 5 more people if we could get the bank funding to do so which we cant. This is the real world situation.

 

Page 24 of 68

 

More Business stories

RSS

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.