Emergency lending

Shares jump as banks pledge support for new funding scheme

 

Banks are "ready and willing" to get behind a multi-billion pound scheme to prevent a second credit crunch but City and industry experts warned today there is no guarantee the plan will kickstart lending.

The coordinated action by the Bank of England and Treasury will see an estimated £80 billion offered to banks on condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

The scheme, which is due to start in the next few weeks, has received a cautious welcome while bank shares were up by as much as over 6 per cent today.

State-backed RBS saw a rise of 6.7 per cent, while Lloyds was up 4.8 per cent.

However, there were warnings that the scheme will not address the core problem of companies' reluctance to borrow, particularly in the face of a eurozone debt storm that could deepen this weekend following elections in Greece.

Graeme Leach, chief economist at the Institute of Directors, said: "The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing.

"But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost."

And economists cautioned that banks may simply not want to lend more, even with the carrot of cheaper funding.

Vicky Redwood of Capital Economics said: "High bank funding costs are just one challenge facing the UK economy. Indeed, these moves on their own will do little to reduce the effect of the eurozone crisis on UK exports or reduce the uncertainty facing UK companies."

In his annual Mansion House speech, Bank governor Sir Mervyn King also activated facilities for an emergency scheme that offers six-month liquidity to banks in tranches of at least £5 billion a month.

The two measures are estimated to be worth around £100 billion in funding to banks.

The banking industry has been hit by higher funding costs as the eurozone troubles have escalated and have been hoarding money for fear of another worrying phase in the crisis.

The British Bankers' Association (BBA) said it was "ready and willing" to get behind the moves.

BBA chief executive Angela Knight said the industry welcomed the news that the Bank and Government were "ready to stand with the financial sector in making more money available to fuel the recovery".

Experts also hailed signs that the Bank stood ready to further expand its quantitative easing programme, which currently stands at £325 billion.

Alan Clarke, economist at Scotiabank, said the announcements "come at a crucial time" ahead of the Greek elections, which are being seen as a referendum on the country's future in the euro.

"The Bank has hinted that it has contingency plans in the event of disaster, but has now started to flex its muscles and show that it means business," he added.

However, he cautioned incentives for banks to loan needed to be well thought out: "Past schemes have been conditional on banks increasing their loan books, but we have hardly seen a dramatic rebound in lending. We need to hope that the incentive structure is better designed in this scheme."

The moves follow mounting pleas for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis.

The Bank's QE programme and efforts to keep interest rates at record lows of 0.5% have failed so far to prevent credit from tightening amid the eurozone woes.

Shadow Chancellor Ed Balls was critical of the proposals last night, saying they "do not go far enough".

John Longworth, director general of the British Chambers of Commerce (BCC), called on the Government to look at "more radical" measures to boost economic growth.

The BCC is proposing the Government launches a state-backed business bank to offer finance to new and growing companies.

Expectations are growing for the Bank of England to add to last night's moves by expanding its QE programme at the July rates meeting, or possibly sooner if the situation in Europe worsens.

It is thought central banks globally stand poised to take action to support markets following the Greek elections.

European Central Bank President Mario Draghi said the bank was ready to provide further support "where needed" to calm markets.

PA

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