In anticipation of a second credit crunch exacerbated by the eurozone crisis, they are to offer £100bn to banks to boost lending and to help banks protect themselves from the fall out a Greek exit. The new deal was announced at the annual Mansion House speech last night.
“The government – with the help of the Bank of England – will not stand on the sidelines and do nothing as the storm gathers,” said chancellor of the exchequer George Osborne. “We are rolling up our sleeves and doing everything possible to protect British families and firms.”
The government’s immediate priority was to counter the tightening of financial conditions and increase in bank funding costs caused by the Eurozone crisis. However, the banks could not expect the taxpayer to bail them out a second time.
“It is no longer acceptable for banks to rely on faith, hope and charity,” governor of the Bank of England Mervyn King said. “In present circumstances banks face acute challenges of liquidity, funding and capital – and the greatest of these is capital. Difficulties in liquidity and funding are often a reflection of insufficient capital.
“The black cloud overhead means that today only very large amounts of capital will attract funding at rates close to those in the past. Banks are at risk of future losses from a further downturn in the economy and exposures to the euro area. That is why the Financial Policy Committee (FPC) has encouraged banks to find additional capital in order to increase their resilience to such losses, so reducing funding costs and increasing their ability to lend to the real economy.”
Together, the government and the Bank are working on a temporary bank funding scheme “to bridge to calmer times”. The intention is to prevent an aggregate deleveraging of the banking system that might hold back recovery.
Banks will be eligible for the £80bn’s worth of cheap funding – which should be in place “in a few weeks” –for an extended period of four years, at rates below current market rates, provided they pass the benefits on business loans and mortgages to the UK non-financial sector.
King said that the Bank would activate a scheme that it put in place last year to provide banks with emergency cash “in response to actual or prospective market-wide stress of an exceptional nature”. This will help protect them if the eurozone crisis worsens.
Osborne also announced that he intends to amend the Financial Services Bill to give the new FPC a secondary role aimed at ensuring that the capital and liquidity regimes balance the need for strong banks while encouraging growth through easier credit.
The coordinated action would, he said, inject new confidence into the UK’s financial system and support the flow of credit to where it is needed in the economy.
“We are not powerless in the face of the eurozone debt storm,” he added. “Together we can deploy new firepower to defend our economy from the crisis on our doorstep.”