At the Mansion House speech a couple of weeks ago the Chancellor of the Exchequer and the Governor of the Bank of England announced the government's new Funding for Lending scheme.
As several surveys, including the Bank of England's, the BBA's, and our own have shown, for many companies credit conditions remain constrained. The Funding for Lending scheme has therefore been designed to sustain and encourage new lending. This is an important goal. As the Chancellor himself pointed out:
“A lack of credit is damaging businesses and costing jobs”
Funding for Lending reflects a recognition that more needs to be done. On Tuesday, the Governor of the Bank of England expressed concern that some of the government's previous attempts to increase access to credit may have been ineffective.
What is different about Funding for Lending?
Members of the MPC pointed to the aspects of the Funding for Lending scheme that should differentiate it from previous attempts to boost lending in the economy.
The Funding for Lending scheme is designed to take advantage of the record-low borrowing rate currently faced by the government and pass some of this on to business. The basic idea is that the scheme should mean UK banks can access to wholesale funding at rates below the natural market rate over several years.
Crucially, access to the scheme will be linked to the performance of the banks in sustaining or expanding their lending to businesses and individuals throughout the UK.
Will it work?
Mervyn King pointed out that the biggest challenge facing banking was the macro-economic challenge. The economy is in a precarious position, as the Eurozone crisis continues to weigh on confidence and demand. Lending to businesses has declined of late. While the aim of the Funding for Lending scheme will be to increase lending to business, conditions in the economy will inevitably affect whether this happens or not.
King said that he would be happy if the scheme expanded lending, but that for him the definition of success would be that lending was higher than it would otherwise have been were the scheme not in place. The fact that access to the scheme is linked to how much banks lend should provide a significant financial incentive to lend.
Full details of the scheme have yet to be released, and we will blog more on it then.