Doubts growing over business lending plan

£80bn scheme could fall flat as companies shun borrowing, City warns ministers

City analysts and business leaders lined up yesterday to warn that the Government's new, £80bn business lending scheme is likely to prove less effective in boosting the economy than ministers hope.

Graeme Leach, chief economist at the Institute of Directors, said the cheap loans for new lending programme announced by the Chancellor and the Bank of England Governor at the Mansion House on Thursday would run into the problem of weak demand for credit.

"Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost," he said.

This was echoed by Chris Cummings of the TheCityUK, a pressure group representing the financial services, who said the problem in the economy is that businesses are too nervous to borrow and invest, rather than a shortage of supply from banks.

"Our members tell us that there is relatively weak demand from businesses for funding due to the ongoing economic uncertainty," he said.

John Longworth, director general of the British Chambers of Commerce, pointed out that previous efforts to stimulate lending by banks had failed and questioned whether this latest scheme would be any different.

He said. "Additional quantitative easing and the credit easing programme have not had the desired impact on the real economy. Can the Chancellor and Governor make sure these sequels trump the originals?"

Vicky Redwood, an economist with Capital Economics, said there was a danger that banks might not participate in the scheme, out of fear of exposing themselves to potential losses resulting from new lending in an uncertain climate.

There was, however, a warm welcome for the activation of the Bank of England's extended collateral term repo facility (ECTR), which will allow private banks to borrow cash for six months at ultra-low rates. John Cridland, the director-general of the CBI, described it as "a sensible, pre-emptive move" in the light of financial shocks which could emanate from the eurozone in the coming weeks.

Bank shares also did well as investors drew some comfort from the liquidity insurance. Royal Bank of Scotland rose by 7.9 per cent, followed by Barclays, which was up 4.2 per cent.

The Bank of England will hold its first auction of at least £5bn in sterling loans next Wednesday, and sales will be held at least once a month.

Under the terms of the ECTR, the Bank will accept bids for the funds at a spread of just 0.25 per cent above official interest rates, currently at 0.5 per cent.

This is below the 1.25 per cent spread over Bank rate set when the ECTR was announced last December. The cash will also be made available for six months rather than the 30 days originally anticipated.

There were further signs of the UK economy's declining health yesterday. April's seasonally adjusted trade deficit stretched to £4.4bn, its highest level in almost seven years, as exports to the eurozone dropped sharply.

Q&A: Lowdown on the Government's loan initiative

Q How will this new "funding for lending" scheme actually work?

The Bank of England will allow private banks to borrow highly liquid Treasury bonds and bills for three to four years. In return they will have to pledge parts of their existing loan books to the Bank as collateral – which means those assets are transferred to the state in the event that the banks can't pay back what they have borrowed. The Bank will impose a "haircut" on this collateral, meaning that the value of the pledged assets will have to be higher than the value of the loans. But the effective cost of this borrowing should still be significantly lower than other ways the banks can access funding.

Q How does that help the economy?

To access the cheap funding, banks will be required to commit that the money they borrow from the Bank will be to lent to businesses and households which need credit. The Treasury and the Bank have not set a target, but they point out that if the annual flow of lending increased by 5 per cent that would mean £80bn in new loans.

Q Will that happen then?

Impossible to say since it is depends on the behaviour of banks and borrowers. The banks complain there is little appetite for new loans because people are so depressed about the prospects for the economy. The Labour shadow chancellor, Ed Balls, agrees with this, saying it will only change when the Government injects more demand into the economy by cutting taxes and boosting spending. Others fear the banks have so many bad legacy loans on their books that they are determined to shrink their assets come what may. If this is right, even cheap borrowing will not induce them to lend.

Q How is this different from the other new liquidity scheme, the Extended Collateral Term Repo Facility?

This is strictly for short-term borrowing needs and comes with no strings attached. The Bank will allow banks to bid for six-month sterling loans at an ultra-cheap rate. This lending is not supposed to pump up the economy, but to ensure that banks don't run out of cash thanks to shocks from the eurozone.

Q Can this be called a Plan B for the economy?

It's more like Plan A plus. The Government and the Bank of England are keeping fiscal policy tight and sticking to their deficit-reduction schedule, but enacting a fresh loosening of monetary policy. They hope that by pumping enough liquidity into the financial system, this will have the effect of stimulating confidence and demand throughout the economy.

Sport
Raheem Sterling and Luis Suarez celebrate during Liverpool's game with Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
Arts & Entertainment
The original design with Charles' face clearly visible, which is on display around the capital
arts + ents The ad shows Prince Charles attired for his coronation in a crown and fur mantle with his mouth covered by a criss-cross of white duct tape
Sport
Steven Gerrard had to be talked into adopting a deeper role by his manager, Brendan Rodgers
sport LIVEFollow the latest news and scores from today's Premier League as Liverpool make a blistering start against Norwich
News
People White House officials refuse to make comment on 275,000 signatures that want Justin Bieber's US visa revoked
VIDEO
News
Sir Cliff Richard is to release his hundredth album at age 72
PEOPLESir Cliff Richard has used a candid appearance on an Australian talk show to address long-running speculation about his sexuality

Sport
Mourinho lost his temper as well as the match
sportLiverpool handed title boost as Sunderland smash manager’s 77-game home league run
News
The speeding train nearly hit this US politican during a lecture on rail safety
news As the saying goes, you have to practice what you preach
Sport
Mercedes Formula One driver Lewis Hamilton of Britain (front) drives ahead of Red Bull Formula One driver Daniel Ricciardo of Australia during the Chinese F1 Grand Prix at the Shanghai International circuit
sport Hamilton captured his third straight Formula One race with ease on Sunday, leading from start to finish to win the Chinese Grand Prix

Arts & Entertainment
Billie Jean King, who won the women’s Wimbledon title in 1967, when the first colour pictures were broadcast
tv
News
Snow has no plans to step back or reduce his workload
mediaIt's 25 years since Jon Snow first presented Channel 4 News, and his drive shows no sign of diminishing
Life & Style
food + drinkWhat’s not to like?
Voices
Clock off: France has had a 35‑hour working week since 1999
voicesThere's no truth to a law banning work emails after 6pm, but that didn’t stop media hysteria
Arts & Entertainment
Maisie Williams of Game of Thrones now
tvMajor roles that grow with their child actors are helping them to steal the show on TV
Arts & Entertainment
Kingdom Tower
architecture
Life & Style
Lana Del Rey, Alexa Chung and Cara Delevingne each carry their signature bag
fashionMulberry's decision to go for the super-rich backfired dramatically
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit