Last week the Chancellor of the Exchequer, George Osborne unveiled a £100 billion stimulus package to try to avoid a second credit crunch. It is an emergency scheme acknowledging the gathering storm in the eurozone.
The emergency funding plan is backed by the Treasury but will be run by the famous institution on Threadneedle Street. The Bank of England is to offer money to high street banks to kick-start mortgage and small business lending to prevent loans being ‘set-aside’ for families, businesses and entrepreneurs.
This announcement made at the annual Mansion House dinner in the City was designed to shore up confidence before the looming elections in Greece are held this weekend and it also shows that the Government is standing behind the banks. Osborne stated at the dinner; “we can deploy new firepower to defend our economy from the crisis on our doorstep. Funding for lending to the family aspiring to own their home and the business that wants to expand…The Government - with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers.”
The package is two-fold. First the ‘funding for lending’ scheme will allow high street banks to temporarily ‘swap’ assets such as their mortgage books with the Bank of England in return for money that can be loaned to customers. The estimate is that £80 billion of new loans could be supported by the package.
The other part of the stimulus package will see the Bank of England pump a minimum of £5 billion a month within the next few days into financial institutions to improve their liquidity.
Will small businesses actually apply for credit?
This blog has played host to a number of past articles that dissect why banks are not lending to small businesses. It does seem positive that the Government is backing a monetary policy to increase lending, however the crux of the matter still hinges on supply and demand. Sir Mervyn King said it himself that the “effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole.” Businesses and households are preparing for the worst, thus lowering their spending and demand for credit. The funding for lending scheme helps the supply of capital and the demand for it, by lowering the cost of borrowing.
Commentators are worried how the schemes will work, “how, for example, will the funding for the lending scheme be set up and monitored so that it does in fact deliver money to the real economy?” asks the director-general of the British Chambers of Commerce. SME owners are suspicious about the extent to which banks will participate in the funding for lending scheme and whether members will see the money. There are calls for a tougher monitoring policy i.e. we need to be better at following the money.
Confidence is another issue; companies made anxious by the eurozone will not be as willing to borrow, regardless of cost. Giving banks money does not necessarily translate into loans. Surveys by the British Chamber of Commerce and the Federation of Small Businesses show that SMEs are nervous of their prospects in the short and medium term. Given the economic climate it’s no surprise that firms maybe reluctant to add debt to their balance sheets.
Now more than ever it seems appropriate that businesses should turn to the private sector for an alternative source of working capital finance. Many relatively young tech start-ups offer options that are different from traditional bank products, from new entrants to the banking market, to crowd-sourced equity providers, peer-to-peer lending, as well invoice finance.
The Treasury and the Government should be applauded for the stand it is making however a lot still depends on the macroeconomic climate in Europe.
- Osborne unveils £140bn scheme to kick-start stagnant economy http://www.telegraph.co.uk/finance/financialcrisis/9332570/Osborne-unvei...
- Debt crisis: emergency action revealed to tackle 'worst crisis since second world war' http://www.guardian.co.uk/business/2012/jun/14/debt-crisis-emergency-mea... • No guarantee
- £140bn emergency funding plan will kickstart economy, warn experts http://www.telegraph.co.uk/finance/9333829/No-guarantee-140bn-emergency-...
- Funding lifeline for the banks highlights how deep the crisis is http://www.telegraph.co.uk/finance/comment/damianreece/9332974/Funding-l...
- Small Talk: Will small businesses want the billions offered to them? http://www.independent.co.uk/news/business/sharewatch/small-talk-will-sm...