UK unveils "funding for lending" to restart growth

Fri Jul 13, 2012 1:39pm EDT
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By David Milliken and Matt Scuffham

LONDON (Reuters) - Britain gave details on Friday of its new scheme to get banks to lend, with some 80 billion pounds ($123 billion) of cheap loans available provided they go to households and businesses.

Part of efforts to lift the economy out of recession, the "funding for lending" plan was jointly announced by finance minister George Osborne and Bank of England Governor Mervyn King last month.

However, the challenges facing the scheme became clear just hours after it was announced, when one of Britain's biggest banks, HSBC (HSBA.L: Quote), said it did not want to take part and preferred to fund lending from its customers' deposits.

Previous schemes to spur lending since the financial crisis have failed to give a clear boost to the economy, putting pressure on the BoE and the Conservative-led coalition government, which have been quick to blame much of the country's economic woes on the neighboring euro zone debt crisis.

Osborne and the BoE insist this scheme will be different, as it ties banks' access to the scheme and the cost of using it directly to whether they raise total lending to British firms and households.

“"The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy - showing that we are not powerless to act in the face of the euro zone debt storm," Osborne said.

Britain's top banks fell short of their government targets to lend to small businesses last year and not all economists are convinced that the scheme will lead to a pick up in lending or that individuals and businesses have the appetite to borrow.

"The economic outlook is currently both worrying and highly uncertain, so banks may still be reluctant to lend to many companies and households whatever the cost of their funding because of the perceived risks involved," said Howard Archer of IHS Global Insight.   Continued...