The Government’s flirtation with credit easing

Having mentioned the introduction of a National Loan Guarantee Scheme (Scheme) in his Autumn Statement, George Osborne has now unveiled the full details of his latest attempts to boost bank lending. This represents a shift from a quantitative easing policy, which involved flooding the economy with extra money, to a credit easing policy to help stimulate economic growth by giving smaller businesses easier access to debt finance.

What is the Scheme?

The Scheme allows banks to raise up to £20 billion of funding, guaranteed by the Government, in order to lend directly to smaller businesses at a lower cost than would otherwise be the case. Businesses with a turnover of up to £50 million will be eligible and banks can apply for the Government guarantee within a 2 year window. The Scheme is only available to loans with a minimum term of 1 year, therefore revolving facilities and overdrafts will not fall under the Scheme. The first tranche being made available is £5 billion, with the next £15 billion available over the next 18 months (in tranches of £5 billion).

In order to avoid EU prohibitions on state aid for business, banks who sign up to the Scheme will have to pay a 0.3% fee to the Treasury. Participating banks must show that the benefit of this guarantee is passed on to qualifying businesses through lower interest rates. Therefore businesses taking out a Scheme loan will receive a discount of 1 percentage point to loans outside of the Scheme.

Which banks are taking part?

So far Barclays, Santander, Lloyds, RBS and the niche specialist lender Aldermore have signed up. These banks’ apparent appetite for the Scheme is reflected by Lloyds’ claim that it could “rekindle confidence, stimulate demand and encourage investment”.

Positive words indeed, however not all banks have the same enthusiasm. HSBC are a notable exception. Their excellent credit-rating means that they can borrow much more cheaply than other banks (with their cost of borrowing being closely aligned to that of the Government). It argues that since it funds its corporate lending almost entirely from customer deposits, it simply wouldn’t be cost-effective for HSBC to sign up and borrow money from the wholesale markets. Similarly, the Co-operative Bank has stated that it would be more expensive to obtain funds through the Scheme than its current methodology.

Business reaction

Feedback has been generally positive to the Government’s proposal.

John Walker, national chairman of the Federation of Small Businesses (FSB), commented that “recent FSB research indicated that around 60% of small firms believed that credit is unaffordable and so this scheme should help to reduce that burden”.

However, John Longworth, director general of The British Chamber of Commerce (BCC) did offer a caveat to his initially positive response. Despite claiming it was a step in the right direction, he commented to the BBC that credit easing “…will not help the smaller, younger, and high-growth firms that have trouble getting credit in the first place.”

Can a business benefit from multiple Government schemes at the same time?

The simple answer is yes, although the total amount of benefit that a business can receive from a different scheme may be limited by state aid rules since a business may not receive more than EUR 200,000 worth of state aid over any 3 year period. Any loan received under the Scheme would count towards this limit, as would any other state aid received through such schemes as the Enterprise Finance Guarantee.

Will it work?

The concept of credit easing itself is paradoxical. On one hand, the Government hopes to reduce any implicit taxpayer subsidy by imposing greater capital requirements and structural changes on banks (therefore reducing the risk of future publicly-funded bailouts). However simultaneously, the Government is subsidising loans to smaller businesses.

Hopefully the Scheme will have a positive impact on UK plc, however the Government is not forcing the banks to take greater risks when choosing which businesses to lend to.


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