Sir Mervyn King And George Osborne Unveil 'Funding For Lending' Scheme To Kick Start Economy

'Funding For Lending' Plans To Ward Off New Phase Of Credit Crunch Unveiled

Plans for a multi-billion pound injection of funds into the economy have been unveiled, a scheme which hopes to kick-start lending to households and businesses.

Bank governor Sir Mervyn King and Chancellor George Osborne announced they were working together on a "funding for lending" proposal to ward off a worrying new phase of the credit crunch.

Under the proposals, expected to be worth around £80 billion, British banks - facing higher funding costs and under pressure to put more capital aside - will be offered vital funding at low interest rates.

Sir Mervyn King, governor of the Bank of England, unveiled the funding for lending scheme on Thursday night

It means that banks will be offered cheap loans by the Bank of England, provided they lend the money onto businesses and consumers.

In this way the funding will be linked to bank lending performance, in an attempt to free up the log-jam in credit hitting the economy.

The new scheme is expected to be in place within a few weeks and will last for four years. In the wake of the scheme, bank shares have risen by as much as 4% for the Royal Bank of Scotland, while Barclays Bank shares are 2.75% higher.

Shadow Chancellor Ed Balls was critical, saying the proposals "do not go far enough".

"The Governor is now recognising what the Chancellor still refuses to - that urgent action to stimulate the British economy is needed now that we are in a double-dip recession."

Ed Balls has said that flooding the economy with money will not solve the lack of confidence. He said the banks need nourishment not 'Lucozade'

He issued a renewed attack on George Osborne on BBC Radio Four's Today programme developing his argument that the new funding for lending scheme is an admission that the government's existing policies have failed.

There has been some scepticism levelled at the scheme as applying for the funds is voluntary and there is no guarantee that the bank will find businesses to lend to.

He told presenter Evan Davis "Our chancellor's diagnosis has never been right and that's why it's not working."

"The fiscal crunch the chancellor imposed on the economy two years ago choked off our recovery before the eurozone crisis."

He claimed that fiscal confidence could not be solved by monetary policy, and that the lack of confidence was the real issue in need of addressing.

The Bank has already pumped £325 billion into the economy through its quantitative easing scheme and has maintained interest rates at record lows of 0.5%.

In a speech to the Mansion House in the City of London, Sir Mervyn said: "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."

The governor also said the Bank would be activating facilities which offer liquidity to banks of at least £5 billion a month that were first announced last December to help pump cash into the system.

Mr Osborne said: "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep."

He added: "The government - with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers.

"We are rolling up our sleeves and doing everything possible to protect British families and firms."

Before the speech a man dressed in black tie tried to present the Chancellor with an exercise book with GCSE Maths written on the front. The man was pulled away from Mr Osborne and is not thought to have been arrested.

The moves follow increasing calls for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis.

Andrew Tyrie, chairman of the Treasury Select Committee, had said the Bank of England "needs to do more to demonstrate that it is providing liquidity".

But in response to the Mansion House speeches, he said: "This looks very encouraging. The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks.

"These are exceptional circumstances. They require exceptional measures."

Sir Mervyn said the UK was facing an "ugly picture" in the world economy as the crisis in Europe escalates and as signs point to a slowdown in China, India and other emerging economies.

He eurozone crisis "has grown to cast a long shadow over our own recovery, holding back both exports and investment".

He added that Britain's economic outlook had worsened since the Bank's last inflation report just four weeks ago.

However, he offered some reassurance, saying the UK "can and will get through this".

He also said that families were being offered a "silver lining" in the form of lower inflation, which has fallen from 5.2% last September to 3%.

The Bank is soon to take charge of prudential regulation under a shake-up of financial regulation.

Commenting on the plans, Sir John Vickers, head of the Independent Commission on Banking, said there was "not a contradiction" between the ICB's aims, with recommendations on long-term banking reforms and the immediate needs of the economy.

He said: "One has to distinguish between the crisis we're in right now and where we want to get to.

"What to do in the short term where we've got fiscal consolidation going on at a time when the economy's very weak, so all the instruments of monetary policy, including some innovative and unorthodox ones are being deployed and extended."

Speaking on the BBC Radio 4 Today programme, he said the current difficulties linked to the eurozone crisis "underlines just how important it is for the medium and longer term to have a safe and sound banking system", adding that yesterday's measures were "very important to build that platform for the future, just as the short- term issues are tackled".

Mr Osborne said he was also adding a new growth remit for the bank's Financial Policy Committee as part of aims to shore up the UK's battered economy.

Earlier in the year, the government launched the National Loan Guarantee Scheme - also known as credit easing - under which £20 billion was made available to small businesses.

The scheme will allow businesses to borrow - through participating banks - at the same low-interest rates at which the government currently borrows as a result of the UK's perceived safe-haven status from eurozone turmoil.

The chancellor's speech comes as Spain's borrowing costs spiked to 7% - so-called bailout territory. Investors can now demand a 7% return on 10-year bonds, an 'unsustainable' rate of return according to many analysts.

Ed Balls' tussle with Evan Davis on the Today programme over the state of the British economy, and what was responsible for the crash caused a flood of Twitter users to offer their own opinions on the matter. Take a look at some of the views broadcast on the social media site below and leave your own thoughts on the matter.

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