By: DailyForex.com
The core business of any bank is lending, but in the aftermath of the global financial crisis, many banks have been reluctant to lend money to each other - let alone businesses. In principle, this has led to a lack of liquidity for business lending and has been attributed as one of the factors which explain why the global recovery has been less than spectacular.
The UK and the US Federal Reserve have attempted to address the problem of limited money supply by pumping funds into their economies through quantitative easing (QE) – the USA has already used more than $2 trillion for its QE programme. The idea is that money is provided to financial institutions such that they can buy government bonds for their client (i.e. the government) and are paid a commission for their services. The theory goes that this money can then be lent out to business. Whilst it is clear that QE has had some effects, it would be fair to say that it has not been a rip-roaring success since the economies that should have benefited from it are still sluggish.
One could be forgiven for thinking that if government wants to ensure that business has access to finance in a bid to stimulate the recovery, it could be achieved more directly than through the convoluted QE mechanism. It seems that the UK government has woken up to this idea. Business secretary, Vince Cable, has announced that the government intends to make £1billion to fund a new bank which will have the mandate of lending to small and medium businesses. Speaking at the Liberal Democrat conference, Mr Cable said: "We need a new British Business Bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy.
Today, I can announce we will have one. I am working with the chancellor to develop a state-backed institution that will combine up to a billion pounds of new government capital with a larger private sector contribution. This will then apply further leverage through guarantees to support up to £10bn of finance to SMEs and mid-sized business - a significant portion of all the lending available."
The bank will operate through existing lenders and is expected to be running within 18 months – a case of bolting the stable door after the horses have fled, perhaps; but in any event, a step in the right direction.