Getting banks lending - Liberal Democrat proposals

The Government bank bail out isn't working. Despite billions being pumpedinto the banking sector and the Government taking large stakes in Britain'smajor banks, viable businesses are continuing to go under as banks pulllending from them.

Although the bail out has ensured that no further British banks havecollapsed, the banks are reneging on the deal that was struck with theGovernment. If they continue to hoard capital, refusing to lend to viablebusiness and individuals, we are doomed to head into an ever deeperrecession.

1. In the last three months total secured lending by banks toindividuals and housing associations fell by £22.6bn. That is thelargest 3 month fall since the Bank of England started collectingdata on this in 1993[1].

2. Just under half of small businesses say it has been harder to gainaccess to finance in the last year[2].

3. Despite the falling base rate the rate charged by banks to loancustomers has risen in the past 12 months, by an average of 1.24percentage points[3].

The Government, as a majority shareholder in 3 of the UK's major banks andthe effective guarantor of all the others, must use its position to insistthat banks lend at the levels they agreed to as part of the bank bail outplan. This means Government directors on the boards of part-nationalisedbanks must take an active role to ensure that banks lend to viablebusinesses.

The Government must also now develop a plan B to be put in place if currentmeasures prove to be insufficient to help good businesses through therecession. A plan B would also ensure that the banks realise that theycannot hold the Government to ransom and if they fail to perform the job oflending themselves, this will be done for them. The Government shouldinvestigate:

Removing bad assets from banks balance sheets to help restoreconfidence to the markets. These assets could then be run by a 'badbank' created by the government and if possible sold when marketconditions are more favourable.

Creating a system of direct lending, with SMEs being made a priority.There are several possible ways this could be done:

- Through the setting up of an entirely new bank, with governmentbacking, whose remit is to supply affordable credit at prudentlevels.

- Extending the powers of the Post Office to offer lendingservices making use of its considerable branch network.

- Allowing local councils to lend, though again issues ofexpertise would have to be addressed.

- Using one or both of the two fully nationalised banks to offeraffordable lending.

Under any circumstance direct lending should only be seen as a temporarymeasure. The longer term priority must be to ensure that the banks are puton a stronger footing and regulated in such a way that they can resumeprudent lending to small businesses and individuals.

[1] Source: Bank of England lending figures

[2] Source: Federation of Small Businesses.

[3] Source: moneysupermarket.com