£140 million to Boost Lending

by Mark Johnston

The authorities are worried that the economy will take a nasty turn for the worse, especially if the euro zone crisis deepens any further. In particular, they fear that lending and borrowing will dry up, thus pushing the economy deeper in to recession.

It seems therefore that urgent action is now required to help stimulate the British economy, especially now it has entered a ‘double dip’ recession.

Many banks and building societies are currently struggling to borrow finance at reasonable rates in the wholesale market and have therefore they have already begun to pass these higher costs on to their customers by increasing their own standard variable rates (SVR).

Graeme Leach, chief economist at theInstituteofDirectorssaid that “facing a bombardment from the euro zone, the chancellor and governor are calling up the reserves, but the core problem still remains”.

In a bid to boost lending in theUKand to prevent a deeper economic slump, the Bank of England’s governor Sir Mervyn King, along with the treasury, have recently unveiled plans to offer £140 billion to banks.

Although this is on the condition that they pass this on to consumers in the form of cheaper loans and mortgages.

The principles of this plan are that banks and other lenders would approach the Bank of England for finance. They will then swap assets they already have such as loans or even risky mortgages already on their books, with the bank ofEngland. It in turn will probably provide them with ‘treasury bills’ in exchange for their assets.

The commercial banks will then be able to use these ‘treasury bills’ as top quality backing with which to borrow cash with on the wholesale financial markets.

All in all, this scheme will be worth an estimated £80 billion a year, plus additional other short term loans worth an estimated £60 billion.

Melanie Bien, of mortgage broker SPF private clients says that the announcement is “good news for borrowers and should therefore mean less pressure on mortgage rates”.

However, borrowers hoping for a drop in mortgage rates due to the Bank of England’s new lending plans will be left disappointed, but the move could halt the recent standard variable rates (SVR) for the time being.

Shadow chancellor, Ed Balls said of the new plans that “the new scheme is a significant admission that existing policies have failed”.

Economist, Vicky Redwood also added “high bank funding costs are just one challenge facing the UK economy and these moves on their own will do little to reduce the effect of the euro zone crisis”.

In conclusion, as the saying goes ‘you can lead a horse to water but you can not make it drink!! That is the flaw in the governments new plan to boost lending, while the chancellor has given the green light to open the funding floodgates…the big questions are:

How many people are going to lumbar themselves with a new loan if they are worried about their jobs?

How many families are queuing up to take the cash?


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