Funding for Lending

The last month has seen the Government in conjunction with the Bank of England launch a new scheme designed to get banks lending again to the SME sector. The scheme has been snappily titled ‘Funding for Lending’ and seems to herald a change of approach from central government to stimulate investment via a form of supported loans.

The scheme gives banks and building societies access to very cheap loans, 0.25% interest rate, from the Bank of England that can then be loaned in turn to small and medium size businesses. The interesting thing for me in this debate is that virtually all of the main banks are now saying that they have rebuilt their balance sheets following the crash of 2008/9 and are now well capitalized. The banks are also in general missing their targets for lending to the economy, which must mean that they are not willing to lend based on their own decisions about the credit worthiness of the businesses applying for the loans!

If this is the case I cannot see how providing cheaper money to the banks will stimulate further lending to the SME sector, unless the banks revise their credit criteria. The whole backdrop to the banking crisis was characterised by banks lending without the necessary checks and balances in place and ultimately seeing those loans go toxic.

Maybe I’m being a little pessimistic here and that the banks do inject cash into an economy that is in dire need of stimulus to break from these recessionary pressures.