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UK Bank Lending Scheme Is Off Target

June 28, 2012 | Comments: 0 | Views: 182

UK Bank Lending Scheme Is Off Target - The Mansion House Speeches

It's not the lack of growth in the economy or the lack of business confidence; it's the terrified look in the eyes of Mervyn King that's the most worrying.

That and the fact that Mervyn King, previously noted more for lack of action than dramatic action is now advocating what amounts to fairly dramatic action to boost bank lending.

Whilst its not new for George Osborne to advocate more private sector lending, it is rather new for Mervyn King to whole heartedly advocate the same. Osborne and King at the annual Mansion House speech have together mooted measures that will introduce somewhere between £140bn and £300bn into the economy via the UK's banks.

By my count this is the fourth time George Osborne has announced some sort of Government initiative aimed at channelling money through the high street banks to businesses and consumers. This is a difficult thing to count because the announcements disappear as quickly as they are announced. In fact if you Google UK Government Lending Schemes you get a very confused set of search results. This is largely because the schemes are rooted more in myth than history. They have been more fleeting than shooting stars.

We all know recessions happen. Only Gordon Brown ever said he could cure them. The UK by and large stoically accepted that there had to be a recession following the near meltdown of the Banks in 2008. Since that time many employees accepted below inflation wage increases and any UK visitor to Australia would be quickly shocked at how weak the pound has become in some countries. Businesses and consumers alike reviewed and made improvements to their finances by significantly reducing debt levels and reducing their spending. Reduced spending means a drop in output which is of course a recession.

This recession has been occurring for around four years now, taking into account that when the UK did leave recession in 2010 the increase in output was barely noticeable. Officially we are currently back in recession. The problem now is how to get out of it.

The Osborne/King solution is to relax the capital adequacy requirements on banks and give additional money directly to them so that they are able to lend to businesses and facilitate greater mortgage lending.

The question is whether or not a lack of credit is actually constraining financially sound businesses from starting or expanding, or whether there is just insufficient demand in a contracting economy to make business conditions viable for more business lending. Given the efforts to which UK businesses have gone to put themselves on a secure and well managed footing, throwing around large sums of easy credit when there is no demand for it seems nonsensical.

The problem with Mervyn King saying he is going to release lots of money to the banks to distribute to the private sector is that in exactly the same speech he gave dire warnings about the perilous state of this economy, the euro zone and even the BRIC countries. So when Banks have to lend in accordance with the perceived riskiness of an investment, and the chief banker is talking about the black cloud of uncertainty closing in, you can tell why he looks so uncomfortable.

Presumably, the additional money is supposed to reduce the risk premium currently being put on today's loan applications, bringing many applications that would have been received a no into the yes zone. Tracking how a lump sum given to a bank is actually used within each constituent business loan, then deciding which part of the bank's or the Government's money carries the can should the loan default, and then taking into account the complex web of accounts that make up a retail bank's business lending activities seems difficult to manage. At this stage the details of how this will actually be implemented are yet to appear. It is likely that whether or not this solution will really help UK businesses, the difficulties in implementation are likely to stop it being put to the test.

However, surely what the UK really needs right now is a Government that concentrates on making business conditions generally more attractive through fiscal measures and also by encouraging industries where the UK is competitive.

Alistair Robson

18th June 2012

Go to sell your business online and/or to find a business to buy.

Source: EzineArticles
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Uk Borrowing Costs


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