Ben Chu: The case for a good bank/bad bank split?

Outlook Do the central bankers know something we don't? Deputy governor Paul Tucker told the Treasury Select Committee this week he was concerned the Bank/Treasury Funding for Lending Scheme (FLS) wasn't hitting the spot. And Paul Fisher, who was the monetary engineer put in charge of setting up the FLS, gave a speech in Bristol that was less than enthusiastic about its impact. Figures showing how the FLS performed between October and December will be out on Monday. But these hints from Threadneedle Street seem to suggest they aren't going to blow us all away.

So what next to encourage bank lending? Mr Fisher cited an interesting fact in his Bristol speech. He pointed out that almost half of all the stock of UK bank and building society lending to corporates is to the property sector, and much of the rest of their loans will be secured on property.

That's a plausible explanation for the relentless deleveraging we're seeing from the banks in spite of all the inducements put in place for them to lend. With the commercial property sector still on its knees, lenders may feel they are sitting on a massive chunk of, as yet, unrealised losses. This could explain what many regard as their unreasonable conservativism when it comes to new lending.

If one buys this, the old argument in favour of a good bank/bad bank split, which should enable the good banks to expand their lending freed from the millstone of poor legacy assets, must surely look more attractive than tweaking incentives through schemes like the FLS.

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