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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Eurozone in Crisis

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  • rate this
    +1

    Comment number 1353.

    Eurozone countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Greece, Ireland, Spain, and Portugal have needed bailouts to keep from defaulting. Italy saw its elected government forced to quit and austerity imposed by Brussels. Cyprus is next. A third of the eurozone has crumbled

  • rate this
    0

    Comment number 1352.

    So the answer to a crisis where the banks lent recklessly is to give them more money so they can return to lending recklessly? The reason they are not lending now is because they are doing their job and not lending money to every clown who thinks they are an entrepreneur, or every speculator who thinks their house is a commodity. Easy credit may increase spending but will raise personal debt.

  • rate this
    +3

    Comment number 1351.

    @1275 Ppuj
    "1260. Gusgog

    The only way to create income is to sell goods to other countries. Simple economics."

    Not so simple in fact. Especially as the other economies are going through the same effects. The banking DERIVATIVES bubble is worldwide. It's the foundation of the monetary system that needs changing. JCisJD is right; you don't need to insult him/her.

  • rate this
    0

    Comment number 1350.

    If you missed it, try David Malone's The Debt Generation

    Non "experts" (i.e. not on City pay/sponsors) have seen this coming for years, & have blogged the reality throughout the con

    Not about party political difference, more the wholesale failure of corporatised party politicians to act for the 99% above the self interests of the insolvent City of London

    It will hurt, but THEY are bust, not us

  • rate this
    +1

    Comment number 1349.

    You seem to almost revel in your apocalyptic vision of fiat currency and social collapse. Interesting that you point to the problems they had in Argentina in 2001 & yet they still have a functioning society, a currency, no civil war, food to eat & are sabre rattling war over the Falklands again - hardly a Country on its knees.

  • rate this
    +4

    Comment number 1348.

    1316. Billythefirst

    YES Those who think this is about party politics, personal debt, or returning to 3% growth are ether being manipulated, missing the point or both

    Those working within this system & R not distracted know its gone WAY WAY BEYOND THAT

    This is more than a few 100 billion or even a single trillion

    THE TOXIC DEBT, the big stinking elephant in the room runs into 100s of TRILLIONS

  • rate this
    0

    Comment number 1347.

    Beautiful planet, splendid country, best technology ever, ample resources and manpower.
    Life should be grand.
    A man-made problem is ruining my enjoyment!
    Those guys at Goldmann Sachs want my share.
    Reading this blog I feel they may have gone a step too far...

  • rate this
    +2

    Comment number 1346.

    Ponzified politicians bailing out bent bankers to the tune of billions (again).

    When will the British public stand up and say ENOUGH IS ENOUGH?!

  • rate this
    0

    Comment number 1345.

    The Banks won't lend because they are not lending to people who can't afford it. The reason we are all in this mess is because they lent to anyone in the past and gave no thought to how it would get paid back. The Govt should raise the tax threshold which will put money into the pockets of everyone - especially the lower paid to get the economy moving. Giving it to Bankers and the rich won't.

  • rate this
    0

    Comment number 1344.

    I was always told that when you find yourself in a deep hole, stop digging.

    Yet they just keep on digging, and we just keep on letting them dig, even though they have managed to snaffle the ladders from us all and scramble to safety. So they have told us we must keep digging now.

    Wake up and smell the coffee. They will not give up voluntarily. The issue will HAVE to be forced.

  • rate this
    +1

    Comment number 1343.

    Vince Cable, when in opposition , said nobody should be charged more than 25% interest but when he had the chance in November last year to implement this he said that if a limit was set all the banks would move upto it.

    Dr Cable they have exceeded this and have taken your inaction as a green light to have no limits.

  • rate this
    0

    Comment number 1342.

    Are the banks going to lend to the business's at the same low rate they get it off the B of E? Or is this another opportunity for the banks to make money by lending at a rate that is higher than the rate they are borrowing at? Just give the money to the people in the form of lower taxation, VAT and lower thresholds for business and taxpayers.

  • rate this
    0

    Comment number 1341.

    1333 aitch35
    living beyond ones means only hurts he who delves,
    no sympathy...........sorry.

  • rate this
    0

    Comment number 1340.

    "If you're going to do QE...surely just lend directly to the people you want it to go to, instead of by the delivery boy who keeps pocketing it"

    They can't do that and simultaneously keep up the illusion of free markets. Governments aren't meant to go bust. Banks who have bankrolled government spending were never meant to go bust. But that's what's happening. They won't admit the model is broken.

  • rate this
    +1

    Comment number 1339.

    1319.Gusgog
    1309.Dancin Pagan The Mad Kiltie
    "Typical Tories, whenever there's a problem they just throw money at it & hope it will sort itself out"
    -
    Labour "Threw" £1 Trillion+ of on book borrowings....
    -
    You're obviously not "au fait" with the concept of irony :-)

  • rate this
    +4

    Comment number 1338.

    1230.quackshadow

    "Give everyone £100K to spend"

    It wouldn't work. You are right, people may go out and spend like crazy but this wouldn't boost the economy as you claim it would just hyper inflate prices in the shops & so suddenly all you can buy with your £100K is a loaf of bread. This would in turn lead to hyper wage inflation & our economy, currency and society would collapse

  • rate this
    -1

    Comment number 1337.

    @ANGELAMERKELSEVILTWIN.

    Britains fiat currency is to far gone to be saved, human nature, fractional reserve banking and a corrupt government saw to that.

    Lots of people in argentina didnt prepare for their economic collapse because they thought it couldnt happen to them, and then it happened.

    This is the reason they didnt prepare http://en.wikipedia.org/wiki/Normalcy_bias

  • rate this
    0

    Comment number 1336.

    1320.AngelaMerkelsEvilTwin
    "A properly managed fiat currency...."

    Absolutely a lot of posters use the term in a derogatory way. There is nothing wrong with a fiat currency, it's a fiat currency, whose supply through fractional reserve banking, is in the hands of of private banks.

    bobloblaw14

    I agree with most of what you say, but I believe you have a mis-conception of what fiat money is.

  • rate this
    +3

    Comment number 1335.

    #1309 Gus
    These BoE Gov't plans are loan FACILITIES, business confidence needed to invest to draw down on this facility.
    -----
    Is that a loan in the Eire bank bailout sense, where we make a "profit" on the loan that we loaned to a basket case economy that Gideon admired?
    Do you mean the business confidence of the confident businesses trying to extract loans from the subsidised banks?

    Clot.

  • rate this
    +1

    Comment number 1334.

    The whole global financial system is a madness. There is enough money in the world to solve the problem. It is just in the hands of the wrong people. We need to get the money out of the banks and investors and into the hands of the people who will create demand and hence jobs. Massively reduce the gap between wealthy and poor, across the globe, and there you have it, a recipe for sustainability.

 

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