The Government steps in to stimulate bank lending to small companies
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The Chancellor of the Exchequer, Alistair Darling, is apparently drawing up measures to boost lending to business, amid warnings that banks risk the ultimate sanction of full nationalisation unless they reopen credit lines to struggling companies.
Mr Darling wants new regulations to force banks to give companies more notice of changes in lending practice, including withdrawal of credit lines or sharp changes in interest rates. He is also looking at ways to extend government guarantees to support new business lending, building on existing proposals designed to release funds for new home loans.
Separately Mr Darling wants to clarify capital adequacy rules to make it clear that newly recapitalised banks do not need to sit on a fat cushion of capital and that regulators expect them to lend during the recession.
If these changes fail to reopen choked credit lines, Mr Darling has a range of fallback options, including the last resort of nationalising the whole banking sector.
Mervyn King, Bank of England governor, emphasised that threat, telling members of parliament: “I think, given what we have seen, it would be an extremely brave person that would rule anything out. It’s very unlikely to be the first option
Banks reject the suggestion that they have reined in lending in spite of the deteriorating economy. Lloyds TSB says its lending to small and medium-sized businesses is up by 18 per cent year-on-year.
Mr Darling this week ordered an inquiry to establish the full facts on business lending, but ministers are under increasing pressure from companies and the opposition Conservative party to take bold action.
Peter Mandelson, now the business secretary, weighed in to the debate saying, “It’s completely unacceptable to the government and to business in this country for banks indefinitely to stop functioning as banks. We are in very intensive discussions with the banks, believe me.”
Mr Darling must see the serious pitfalls in the most radical options available to him, including nationalising the banks, insuring all business loans or directly lending to companies. Bankers confirm that privately ministers are taking a measured approach to the problem.
In the first instance Mr Darling will probably use the Financial Services Authority and Office of Fair Trading to regulate and stamp out what he calls “bad practice” by banks in changing the terms of loans at short notice
He is also said to be looking at ways of extending government guarantees to bank debt to create a source of medium-term finance for new business loans, not just new mortgage lending.
Mervyn King recently told a parliamentary committee that banks are giving up profitable lending opportunities in order to behave defensively. He claims that, collectively, this is a recipe for a deep recession.
