Will Bank of England’s new lending schemes work?

 
Sir Mervyn King Sir Mervyn King's scheme is novel, but will it have the desired effect?

In case you are interested, this is how the Bank of England's two new novel schemes for lending to banks will work.

The Extended Collateral Term Repo (oh yes), whose details are being announced today, will allocate a minimum of £5bn every month to banks in the form of six month loans to them.

The point is not so much the duration of the loans: there is another Bank-of-England scheme that already provides six-month money. It is that the credit will be provided to them against the security of pretty much any assets that the banks have, rather than the more narrowly defined and better quality assets that the Bank currently insists they provide.

To put it another way, the Bank is saying that in a business-as-usual way, with no stigma attached and at a cheaper interest rate, it will provide the funds that till now it would only provide through its so-called discount window - which is where banks go to borrow in an embarrassing emergency.

Why does this matter? Well, it represents the Bank of England saying very publicly that it will provide whatever cash the banks need, whatever the financial weather. So 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.

Funnily enough, earlier this week when I interviewed Hector Sants, the outgoing chief executive of the Financial Services Authority, he said the banks were indeed sitting on more cash than they need to do, rather than lending it, because of their fear of impending crisis.

So maybe the Bank's Extended Collateral Term Repo (get used to it) will address that problem.

That said, I asked a prominent banker whether he was stocking up on more cash than was strictly necessary. His reply was pretty grumpy, especially when I told him that Mr Sants had said to me that banks like his were holding more cash than the regulator was insisting they had to do.

This banker said the FSA was being disingenuous. "The FSA says in public that we're sitting on more cash than they are forcing us to hold," he said. "But in private, the FSA's people make it almost impossible for us to run down our cash."

I put this to a Treasury official. He said that the Bank of England's scheme should persuade both banks and FSA to lighten up: the mere existence of the Bank's new guarantee that easy money is available to banks should lead to an opening of the lending valve.

All that said, it is the other scheme - with the snappier moniker of "Funding for Lending" - which is far more radical. Because it involves something that the Bank of England and orthodox central banks almost never do - which is to lend money with the express purpose of getting it out into the real economy, rather than just providing the marginal credit that commercial banks need to operate efficiently.

The elements of the Funding for Lending scheme are much hazier, and will be finalised in the coming weeks. But this is what officials told me:

1) The maturity of the loans will be for three to four years, which is very long for credit provided by central banks (the European Central Bank's recent life-saving LTRO was three-year money);

2) The banks will only receive the money from the Bank of England if they cross their hearts and hope to die that they will then pass it on in the form of loans to businesses and households - although it is extremely unclear how the Bank will monitor this is happening.

3) There is no limit on how much the Bank of England would like to lend in this way, but it and the Treasury both talked about how a 5% increase in lending to the real economy, equivalent to £80bn of net new loans, would be useful.

One technical thing about the Funding for Lending scheme is that the Bank of England - right now, and this could change - does not think it will provide cash (or so-called high-powered money) to the banks. Instead it will probably provide Treasury bills, or very short term loans, which are a proxy for cash, because otherwise it thinks that the scheme could complicate the way it controls the amount of money in the economy (monetary policy) in some unspecified way.

The other question which the Bank of England and Treasury were really touchy about is whether the Treasury - or taxpayers - will indemnify the Bank against the risks it is running with the lending scheme. The Treasury thinks an indemnity is not needed, that there is very little danger of the Bank of England incurring any losses. But the Bank of England seemed pretty uptight about all this - and, I understand, the issue of whether taxpayers will guarantee the scheme is not definitively settled.

There are two elements to the risks of the scheme. There is a risk that the Bank of England won't get the loans back from the banks. That risk seems pretty small, because the Bank will impose big discounts, or haircuts, on the assets it will take from banks in return for the credit it provides to them.

And then there is the separate risk that the banks themselves are being asked to take when lending to the real economy. Here is where bankers privately express their doubts about how effective the two schemes will be.

Bankers give me two reasons for their doubts about how far the schemes will revive our anaemic economy.

First, they say creditworthy businesses and households are reluctant to increase their debts in these uncertain times. Second, many of the companies and individuals desperate to borrow are those in some financial difficulties, so the banks don't actually want to lend to them.

Here is the nub of the matter: the Treasury and Bank of England want the risks of lending to stay with the banks; but if that remains the case, the new credit almost certainly won't get to those who most need it.

The big outstanding question for the Treasury, therefore, is whether it is prepared to expose taxpayers to the probability that some businesses and households, who may deserve to be kept afloat, would not be able to repay all of what they owe.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • Comment number 377.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 376.

    #375

    we live in a self-preservation society

    These are little people concerned with their own little world, no matter how their (alleged) coke parties infringe on the rest of us.

    Tone can't rustle up the 800bn needed to save Spain, Rupe hasn't got 1.6tn to save Italy.

    Have you got 2.3tn to save the UK ?

    No ?

    Then reality will break through and a 'Truth Adjustment' will take place.

  • Comment number 375.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 374.

    #373

    Truth is subjective
    Something is true (to you personally) only if you believe it to be so.

    Truth is an act of faith

    Like Money is a Representative of Value.

    The hardest thing in life is to understand that what you have been brought up to believe is the truth is a lie that has been sold down the ages.

    The truth lies within/to yourself.

    Take the blue pill, it's much easier

  • Comment number 373.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 372.

    #371
    1. War sells papers (impressions on webpages, viewing figures on tv, CNN was going nowhere till Gulf War 1)

    2. GWB was in the pocket of Wall St. bankers - Operation Robot

    3. They didn't lie, they had a failure of recollection. (there is a difference as to what was said and what was unspoken but assumed)

    Look at outcomes, Rupert is powerful, bankers de-regged (and bailed) and Tony is rich.

  • Comment number 371.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 370.

    #369 Ohsoeasy

    Steve Keen thinks we are a third the way in (which would give another 8 years), I am with JfH on this one, another 24+ years, coincidentally, this is when the boomers will start to die out.

    JfH.

    individual currencies ?, we are there already with individual credit ratings.
    Same product, different no. of £'s based on your risk factors, 'I promise to pay' and all that.

  • rate this
    0

    Comment number 369.

    367 face. If the option is between 'nowhere fast' and 'meltdown' then we are going nowhere fast. This expectation that by some miracle everything will suddenly be fine is wearing me down. We have a miserable 5-10 years ahead no matter who is in power. Remember the U.K. is still going further into debt until at least 2017 - that's how out of hand it's got.

  • rate this
    +1

    Comment number 368.

    #354 enlightened face

    It's Nurture, the rise of the meritocracy perfected, dystopia by design.

    Imagine being 'friends' with the PM or a CEO of a news outfit, are they really relaxed when chatting ? or are you/they working the angles. You/they didn't get where you/they are by being nice.

    What a horrible world, to have everything to lose and no one to trust.

    Is it any wonder they go mad

  • Comment number 367.

    All this user's posts have been removed.Why?

  • rate this
    0

    Comment number 366.

    164 JFR Sounds like a renegotiation fudge is on the way. Long term austerity versus short term austerity. There is no get out of jail free card once you discount printing vast amounts of new money. I think Germany will blink as even they can see their unassailable position will be under threat. France has gone awfully quiet -- their banks are in hock for a large chunk of the lending.

  • rate this
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    Comment number 365.

    364. Ohsoeasy "Monday the situation will be very grave." well 'may be very grave anyway'!

    Who are most at risk - why, its the banks! So if something happens it is to the advantage of the banks to rescue Greece! For if they do not they could face a calamity!

    How's that for an interpretation!

    The banks are after all far far bigger than any state so they are best able to rescue Greece!

  • rate this
    +1

    Comment number 364.

    In isolation there is nothing the U.K. can do that will move us out of recession as long as all our trading partners have closed shop. Has anyone got any constructive proposals without apportioning blame? As of Monday the situation will be very grave. National interest has taken over. Now protectionism.

  • rate this
    +1

    Comment number 363.

    Why is the Government sending money back to the banks again after the recent failure by them to spread it to the public in the first place?
    Ignore the banks and give the amounts directly to the public especially those who are unemployed, they would get the economy going again because they could pay tax ,employ staff, support local industry and would not be a burden on others who pay tax?

  • rate this
    +1

    Comment number 362.

    These new lending schemes are bound to work in some way. There will not be any change in the outlook for the UK pseudo economy, which is going to crash when the 'Government' runs out of lines of credit in the near future, but the banking scam can continue for a little while longer at taxpayer expense.

  • rate this
    0

    Comment number 361.

    UK state borrowing one pound in every four it spends of which one third is printed specially.
    Economy shrinking
    Nothing to refinance with: so print some more money
    Banks keep the money due to big holes in socks
    Economy shrinking.
    The same is happening in Europe
    Economy shrinking.
    Will the banks be reformed before or after the sterling crisis?
    Government complacent.
    Economy shrinks even more.
    Bis!

  • rate this
    0

    Comment number 360.

    Despite court, Nationwide refuse to provide evidence of its AAA Silverstone Sept 2008.
    NW told investors, "EVERY applicant walked into a Nationwide Branch" to be credit assessed. I had not - Fraud. With little credit history, I am not AAA. Investors weren't told of my pre-arranged payment holiday (internationally abducted children). NW steal £20bn of Special Liquidity Scheme. Now want more?

  • rate this
    +2

    Comment number 359.

    #352luditus

    "They could all be put in charge of bottle banks."

    Would you really trust em? Before you knew it they would have a futures market for cullet.
    Pretending it was green.
    Next they would charge for collection and storage.

    And then there are the hangers on.
    What would you do with them?

    There are only so many lift attendants you can put in the Shard.

    All shouting "Going Down!"

    And out

  • rate this
    0

    Comment number 358.

    If I was to go on holiday in Greece next year should I take Euros with me?

    In other words should I buy 2012 Euros to spend?
    Will they go further than 2013 Drachmas?

    Should I wait until tomorrow or the day after or...?
    Could this be the start of a great banking wheeze?
    No worse surely than what we have at present...

 

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