Friday, 15 June 2012

Here's £100bn - now do something

What are the chances for George Osborne's and the Bank of England's £100bn attempt to head off another credit crunch?

There's already worry about whether banks are capable of lending out the money successfully. There are two nuts to crack...

1. Business lending.

What Sir Mervyn King, the Bank's governor, calls the "black cloud of uncertainty" is discouraging banks from lending to firms they think might suffer in the economic crunch. And it is putting entrepreneurs off borrowing. Though some are desperate for loans, many want to pay money back and get bankers off their backs.

The Bank has indicated that High Streets banks would be indemnified against the extra loans going bad - i.e. firms failing to pay them back.

But it isn't clear how far the indemnity would go, so banks could still hold back from lending to the businesses that really need cash to grow.

There's also the worry that some of the loans they do give out will simply replace lending they would have made anyway. The Bank says it will police this risk very carefully. That'll be hard.

2. Mortgages.

The prospects here seem much rosier.

Already a new credit crunch is underway, after first Lloyds and then Santander began to rein back on lending. They're lending less in mortgages than they are getting in from mortgages being paid off.

There's definitely unsatisfied demand for mortgages, especially from first time buyers. Often they are being rebuffed as too risky, but overall what's holding banks and building societies back is that they can't raise the funds at a decent rate to hand out.

So cheap funds from the Bank of England could fill the gap and even boost total lending for housebuyng this year by a small percentage - so that the mortgage total would rise compared with last year rather than fall.

It wouldn't be a huge boost. Mortgage lending is running at just a third of pre-financial crisis levels. While we don't want to go back to the bubble years, a little blow into this limp balloon would help.


All of this could take time to happen: several weeks until the money starts being disbursed, then a three month turnaround (for mortgages) from application to completion.

So we are looking at the boost starting in the last quarter of the year.

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