Page last updated at 13:33 GMT, Wednesday, 11 March 2009

Q&A: Are the banks lending more?

Bank of England

The government has started its latest plan to get more money flowing through the economy to stave off the worst of the recession.

It is called quantitative easing and involves the Bank of England buying up large amounts of government bonds.

It follows hard on the heels of the government using its new "asset protection scheme" to insure some of the big part-nationalised banks against billions of pounds' worth of potential bad debts.

But these are just the latest in a growing list of policies that have been announced in the past few months in an effort to increase the flow of bank lending.

Are any of them working yet?

That depends on who you talk to.

The government says the lending problem lies not with UK banks, but the fact that many foreign banks have more or less stopped lending here.

As a result there is a big gap that needs to be filled.

The large stakes the government has taken in Royal Bank of Scotland and Lloyds Banking Group has, the government says, stopped a truly enormous hole opening up in the UK banking system.

"The risk is we could have lost lending - that hasn't happened," said a Treasury spokesman.

Why are businesses still complaining about loans being hard to get?

Business organisations such as the CBI regularly ask their members what is going on.

And the message they send? "It's getting worse and will continue to do so."

The CBI surveyed its members in February and found that nearly 60% of respondents were finding it harder renew loans and overdrafts or set up new ones.

And 57% said the interest cost of new loans was more expensive then before, despite continued cuts in bank rate.

So what is going on?

It is simple. Everyone, including the banks, knows there is a recession on, so lenders are becoming fussier about to whom they lend.

"Banks are looking very closely at businesses and their plans," said a spokesman for the British Bankers' Association (BBA).

"Banks are looking for businesses with a plan B.

"It doesn't do anyone any good to lend money that cannot be re-paid," he added.

But the BBA denies lending has dried up.

It points to its own statistics which show that in January, lending by UK banks to small businesses rose by 235m.

But hasn't the government done something to stimulate lending to businesses?

Yes it has. You may recall that back in January it announced a

• Working capital scheme to secure up to 20bn of short-term bank lending to firms with a turnover of up to 500m.

• Enterprise finance guarantee scheme to secure up to 1.3bn of additional bank loans to small firms with a turnover of up to 25m

• And a Capital for Enterprise fund with 50m from the government, plus 25m from the banks, to invest in small firms that need cash.

A Treasury spokesman said: "The other schemes are just getting going now - we are confident the schemes will deliver."

Weren't there other plans too?

Oh yes there were, though they were more about rescuing the banking system from imminent collapse.

As well as nationalising Northern Rock and Bradford & Bingley, last year the Treasury spent an initial 37bn taking stakes in RBS, Lloyds TSB and HBOS.

These banks have now agreed to increase both their mortgage and business lending this coming year in exchange for continued government support.

Meanwhile

  • The government has offered 450bn worth of short-term loans and loan guarantees to encourage banks to lend to each other
  • The Bank of England has taken measures to provide more liquidity to banks by allowing them to swap risky assets for more secure government debt.
  • Interest rates have now been cut to 0.5%, the lowest level in more than 300 years.

So, are the banks lending more or not?

Yes, but not as much as before.

The most authoritative source of information about lending is the Bank of England.

Its statistics on what it calls lending to "private non-financial corporations" showed a fall in November and December, but it rebounded in January by an extra 5.4bn.

That left lending 5% higher than a year ago, far less than the annual growth rate of nearly 18% seen in the autumn of 2007, just after the international credit crunch broke.



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