Bank funding scheme plans unveiled

Plans for a multi-billion pound emergency bank funding scheme to kick-start lending to households and businesses have been unveiled.

Bank governor Sir Mervyn King and Chancellor George Osborne announced they were working together on a "funding for lending" proposal to ward off a worrying new phase of the credit crunch.

Under the proposals, expected to be worth around £80 billion, British banks - facing higher funding costs and under pressure to put more capital aside - will be offered vital funding at low interest rates.

But the funding will be linked to bank lending performance in what marks a direct attempt to free up the log-jam in credit hitting the economy.

The scheme is expected to be in place within a few weeks and will last for four years.

In a speech to the Mansion House in the City of London, Sir Mervyn said: "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."

The Governor also said the Bank would be activating facilities which offer liquidity to banks of at least £5 billion a month that were first announced last December to help pump cash into the system.

Mr Osborne said: "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep."

He added: "The Government - with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers.

"We are rolling up our sleeves and doing everything possible to protect British families and firms."

The moves follow increasing calls for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis.

The Bank has already pumped £325 billion into the economy through its quantitative easing scheme and has maintained interest rates at record lows of 0.5%.

Andrew Tyrie, chairman of the Treasury Select Committee, had said the Bank of England "needs to do more to demonstrate that it is providing liquidity".

But in response to the Mansion House speeches, he said: "This looks very encouraging. The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks.

"These are exceptional circumstances. They require exceptional measures.

"It is not just welcome that the Treasury and the Bank of England are working together to secure recovery. It is essential."

Shadow Chancellor Ed Balls was critical, saying the proposals "do not go far enough".

"The Governor is now recognising what the Chancellor still refuses to - that urgent action to stimulate the British economy is needed now that we are in a double-dip recession.

"The Bank of England's new funding for lending scheme is a significant admission that the Government's existing policies have failed. Businesses will be desperately hoping it is more successful than George Osborne's Project Merlin and credit easing schemes which have actually seen net lending to businesses fall."

Sir Mervyn said the UK was facing an "ugly picture" in the world economy as the crisis in Europe escalates and as signs point to a slowdown in China, India and other emerging economies.

He eurozone crisis "has grown to cast a long shadow over our own recovery, holding back both exports and investment".

He added that Britain's economic outlook had worsened since the Bank's last inflation report just four weeks ago.

However, he offered some reassurance, saying the UK "can and will get through this".

He also said that families were being offered a "silver lining" in the form of lower inflation, which has fallen from 5.2% last September to 3%.

The Bank is soon to take charge of prudential regulation under a shake-up of financial regulation.

Mr Osborne said he was also adding a new growth remit for the bank's Financial Policy Committee as part of aims to shore up the UK's battered economy.

Earlier in the year, the Government launched the National Loan Guarantee Scheme - also known as credit easing - under which £20 billion was made available to small businesses.

The scheme will allow businesses to borrow - through participating banks - at the same low-interest rates at which the Government currently borrows as a result of the UK's perceived safe-haven status from eurozone turmoil.

Commenting on the plans, Sir John Vickers, head of the Independent Commission on Banking, said there was "not a contradiction" between the ICB's aims, with recommendations on long-term banking reforms and the immediate needs of the economy.

He said: "One has to distinguish between the crisis we're in right now and where we want to get to, so the ICB recommendations which the Government in very large part has accepted in yesterday's White Paper, that is about where we want to get to, the medium and longer run.

"What to do in the short term where we've got fiscal consolidation going on at a time when the economy's very weak, so all the instruments of monetary policy, including some innovative and unorthodox ones are being deployed and extended."

Speaking on the BBC Radio 4 Today programme, he said the current difficulties linked to the eurozone crisis "underlines just how important it is for the medium and longer term to have a safe and sound banking system", adding that the measures were "very important to build that platform for the future, just as the short- term issues are tackled".