Details of the UK government’s plan to kick-start lending are starting to leak and those hoping to see the creation of a ‘bad bank’ are likely to be disappointed. For the moment at least.
What’s expected to be announced on Wednesday morning is a scheme to help small and medium-sized companies refinance some £20bn of debt that falls due for repayment this year.
Here’s Treasury spokesman BBC business editor Robert Peston on his blog:
Probably the most eye-catching of the measures will be the provision of perhaps £10bn of taxpayer guarantees for short-term corporate loans provided by banks. These loans would cover medium-size companies’ working capital requirements, or their day-to-day financing needs.
Taxpayers would guarantee around 50% of these working-capital facilities, so they would support around £20bn of credit to companies.
The tit-for-tat that the Business Department and the Treasury is imposing on banks is that if they take advantage of these taxpayer-backed facilities, they will then be obliged to provide longer-term loans to sound, relevant, needy businesses. Or, to put it another way: ministers hope that by reducing the requirement of banks to finance companies’ working capital, the banks will be prepared to take a few more risks in financing companies’ investment and longer-term needs.
In addition to that, Peston says the Small Firms Enterprise Guarantee System will be extended and a few tens of millions of pounds of equity capital will be provided to help the survival of strategically important small businesses.
All of which is hardly likely to set the banking sector racing. In fact this complex plan will probably spell the end of the banks’ post Christmas rally, which you can see below.
Clearly, there were other factors buffeting UK banks on Tuesday. Renewed concerns about Citigroup and Ben Bernanke’s speech at the London School of Economics have not helped. (The Fed chairman said more capital injections and guarantees might become necessary to ensure the stability and normalization of credit markets).
On top of all that, there is the short selling ban on UK financials, which ends on Friday. No wonder analysts at RBS were advising clients to steer clear of the sector.
The UK bank sector was coming off before this blog was published, on the back of a worrying drop in US financials yesterday, as well as increasing disillusion over the scale of any government rescue (i.e. the ‘bad bank’). Fed Chairman, Ben Bernanke’s currently speaking in London about the need for further government capital injections and guarantees to stabilise the financial system, which may again bring capital adequacy back to investor’s minds. This blog won’t help, and we remain cautious on the sector while resolution of the bank’s troubled asset valuations and any subsequent capital needs remains unclear.
Related link:
Who’s afraid of the big bad bank? – FT Alphaville