By Michael Millar
Date: Friday 15 Jun 2012
The UK government and the Bank of England have announced multi-billion pound plans to get banks lending more to companies.
The move comes as the UK economy has stalled, with recent indicators pointing to the country remaining in recession for a third quarter.
Chancellor George Osborne said the plan, which reports have valued at between £80bn - £140bn, showed the UK was "not powerless in the face of the eurozone debt storm".
"Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he told an audience of executives from the financial sector at his annual Mansion House speech.
This would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy", the Chancellor said.
It is separate to the Bank of England's £325bn quantitative easing scheme, which has seen it buy government debt from banks.
Instead the Bank will offer lenders capital, probably in the form of Treasury Bills, below market rates.
In exchange it will demand collateral and a promise from the banks to lend the funds on to businesses under a plan called 'Funding for Lending'.
A second scheme, called Extended Collateral Term Repo Facility, will give banks access to short-term money to manage "exceptional market stresses".
The latter scheme will see the Bank of England allocating a minimum of £5bn every month to banks in the form of six month loans.
This credit will be available against a much wider range of collateral than currently permitted by the Bank in exchange for funding.
“The bank and the Treasury are working together on a ‘funding for lending’ scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the U.K. non-financial sector,” said Governor Mervyn King.
The measures would “support the banking sector, and provide it with incentives to increase lending to the real economy,” he added.
However, there are doubts over how effective the scheme will be, with detractors saying there isn't the demand for credit from companies.
"The measures should help to ease strains in the banking sector, but there are question marks over whether they will actually result in higher lending to the private sector," said analysts at Capital Economics.
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