A path strewn with difficulties
An old Chinese proverb states that it is better to take many small steps in the right direction than make a giant leap and fall back. Judging by the number of bank lending initiatives announced over the past three months, British policymakers are taking this to heart.
On Monday, Britain announced no fewer than eight measures to kickstart lending in its credit-starved economy. Despite pouring 37 billion pounds of public money into major banks last October and pledging hundreds of billions more in guarantees, the government had to admit it needed to take more credit risk off banks’ books.
Monday’s package is designed to be comprehensive. It includes — amongst other things — a fund to allow the Bank of England to lend directly to businesses, a framework for boosting the money supply if needed, a guarantee scheme for asset-backed securities and the offer of insurance against potentially explosive losses.
None is a silver bullet and the devil will be in the detail. Much of the nitty-gritty of how these measures will work is still not known.
It is also likely to be a slow process. The Bank of England’s 50 billion pound asset-buying pot is one of the few measures to take effect immediately. Analysts at BNP Paribas calculate this equates to just 2 percent of bank lending in Britain compared to a ten percentage point drop in lending in the last year.
One opposition politician, Vince Cable, likened attempts to kickstart bank lending in Britain to “giving a kiss of life to a corpse.” Colourful. But a revival in bank lending is indeed by no means assured. More steps may yet be needed.