After the National Loan Guarantee Scheme comes Funding for Lending. The finer details of the UK's latest stimulus wheeze may be different, but the gist is the same: give the banks cheap cash and get them to distribute it to the real economy, thereby stimulating investment and boosting growth.
If only it were that easy. It might surprise some, given daily morbid economic headlines, but the UK’s banks are in a pretty good position as it is. They have had little difficulty accessing wholesale markets this year, including printing sizeable deals in euros. Spreads may not be what they were a few years ago, but they are manageable. With the loan guarantee scheme in operation, they are even more so: Barclays and Lloyds both sold deals under the programme at 55bp over Gilts.
Details on the Bank of England's new funding for lending idea are scarce. So it is hard to tell what the new scheme will offer beyond the NLGS, which already pushes banks to pass on the cheaper funding rates they achieve through government guarantees on borrowing.
And that makes it even harder to tell what the point is. The UK’s banks have long peddled the line that it is credit demand, rather than supply, that is keeping down net new lending.
It could be that the high cost of borrowing is dampening that demand — although the subdued take-up to the NLGS suggests it is not just that. It could also be that banks are only considering what they consider to be eligible borrowers when they talk of demand. Again, that is a hard one to counter. No-one could seriously suggest that banks should substantially relax their lending criteria after all that has happened in the last few years.
The upshot is that the government can throw all the cheap cash at the banks as it likes, but it will not necessarily kick-start a flagging economy. After the credit boom, corporates and households are in a deleveraging phase. Making more cash available to companies for investment does nothing if those borrowers are reluctant to invest in uncertain conditions.
The UK government is right to consider how it can keep the economy on track in spite of troubles in Europe. But flooding already well funded banks with more liquidity can only do so much. With that avenue largely exhausted, the government should be looking at other responses. As it is, it owns a couple of banks. Why not turn one into a true development bank?