Financial Regulatory Forum

UK business credit conditions better, lending costs scrutinized

By Reuters Staff
July 27, 2009

By AnBritish finance ministerAlistair Darlingdy Bruce
LONDON, July 27 (Reuters) – British businesses are slowly finding it easier to raise funds from debt markets and bank loans, two surveys showed on Monday, a day after Britain’s finance minister said he was concerned about lending costs.  Companies were able to raise more finance from longer-term markets like corporate bonds in the second quarter, according to respondents in the Bank of England’s quarterly Asset Purchase Facility report, as liquidity and price transparency in the market improved.

Firms were also able to borrow more from banks in June, when lending to British small businesses rose by the 391 million pounds ($646.4 million), the British Bankers’ Association said.

“These figures provide more evidence of the High Street banks’ support for small businesses,” BBA Director David Dooks said in a statement.

The government has pumped billions of pounds of taxpayers’ money into banks to prevent a collapse in the financial system, but officials have complained in recent weeks that banks had been slow to ease lending, which is key to reviving growth.

Finance minister Alistair Darling said on Sunday he remained “extremely concerned” about borrowing costs to small- and medium-sized businesses and promised to ask banks individually about their lending charges.

“What companies are being charged does seem to have gone up relative to what banks are actually having to pay because of the fact that we have very low interest rates,” he told the Andrew Marr show on Sunday.

Darling said he wanted banks to rebuild their balance sheets, “but at the same time because of the particular circumstances we are in now… we also need them to lend money”.

MORTGAGE LENDING STILL SHORT
Insolvency Service figures show some 5,000 British firms went into liquidation in the first quarter, many of them refused vital credit from banks keen to cut their liabilities.

The Bank of England introduced an asset purchase facility to help stimulate lending in the economy, funded by 125 billion pounds ($205.8 billion) of newly created money in a policy of quantitative easing that has been spent largely on government debt, but also on corporate bonds and commercial paper.

The BoE said in April it would be some time before the impact of the programme would be known, but on Monday it hinted that it was starting to influence the wider economy.

“The continued purchases of assets by the Facility during the second quarter of 2009 were accompanied by signs that conditions in corporate credit were improving,” the BoE said.

But so far there has been little evidence of an improvement in property lending.

House prices in England and Wales were flat for a third consecutive month in July, property data company Hometrack said on Monday. It said a broad-based recovery in house prices was still a long-way off, with the market hamstrung by rising unemployment and a shortage of mortgage finance.

“A lack of mortgage finance, low buyer confidence and growing fears of unemployment are currently being offset by increased demand, a pick up in sales and a growing scarcity of housing for sale,” said Richard Donnell, Hometrack’s director of research.

Last week, the Council of Mortgage Lenders said British gross mortgage lending fell 48 percent year-on-year in June, likewise adding that the reduced number of active lenders would likely inhibit any recovery. It left its gross mortgage lending forecast of 145 billion pounds this year unchanged.

See also:

UK’s Darling urges more lending to small business

UK’s Darling to meet bank chiefs again in September

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