More billions thrown at liquidity problem
14 Jan 09
A large pile of taxpayers’ money has been committed to ensuring the banks’ survival. Now the question is how the rest of business can be helped.
Even though the government effectively owns a controlling interest in some of our major banks, so far it is not using that clout to tell them directly what to do. Getting finance circulating again is a key priority and ensuring that businesses have access to the credit they need is crucial. To make this happen, however, the government is resorting to a mixture of persuasion, exhortation and, now, yet another multi-billion pound package of measures to fix our failing system.
The latest, announced today, adds up to around £21 billion of taxpayers’ money committed to restoring liquidity. The government hopes to do this through three main routes:
• Guaranteeing up to £10 billion of lending to provide low-risk working capital for medium-sized companies (which, the government hopes, will free up more of the banks’ capital for riskier, larger loans);
• Guarantees for £3.1 billion in loans to small companies (of turnover up to £25m); and
• A fund to provide up to £50m of equity capital for certain small business in financial difficulties, but which have high growth potential.
Let’s hope it works – something has to. Simply saving the banking system from collapse was a necessary first step but it clearly wasn’t enough to get the rest of the economy working again.
For example, a reader told me this week that assertions that the big banks are basing variable overdraft costs on Bank of England base rates rather than LIBOR (London interbank offered rate) don’t reflect the experience of many business customers.
He said: “That was certainly not the situation for my small company, where our risks have reduced, our borrowing level is the same, yet the first statement at our annual renewal discussion was that the link would be with six month LIBOR and not base rate, and we have renewed on that basis. They also upped the arrangement fee by 0.5 per cent.”
“Nationalised” or not, the banks are still for-profit entities, not public utilities.