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Struggling banks are set to receive emergency help from the government and Bank of England in a ‘funding for lending’ scheme alongside ‘whatever liquidity they require’, Bank governor Mervyn King has said, while also suggesting more quantitative easing could be on the way.
In his annual speech at Mansion House, in the City, King outlined a string of measures to get banks lending amid the ‘black cloud of uncertainty’ posed by the worsening eurozone crisis.
‘Today’s exceptional circumstances create a case for a temporary bank funding scheme,’ he said, allowing banks, which have been attempting to cut their loan books, to start lending to individuals and businesses again.
In exchange for collateral, ‘within a few weeks’ the taxpayer would provide funding to banks for an ‘extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty’.
King, who has in the past said it was the government’s role to provide such help, emphasised that the scheme would be a ‘joint effort’ between the Bank of England and the Treasury.
Speaking after chancellor George Osborne approved the ring-fencing of banks, King also said the central bank would provide commercial banks with ‘whatever liquidity they require’, activating the ‘Extended Collateral Term Repo Facility’ – a shorter-term version of the European LTRO scheme that was created last December – to auction off six-month liquidity.
The promise of such help from the Bank of England and its equivalents around the world means ‘the need for banks to hold large liquid asset buffers is much diminished’, King said, ‘and I hope regulators around the world will take note’.
Stressing that the Bank can help with both bank funding and monetary easing, King said ‘with signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing’.
This suggests the bank could soon extend its £325 billion quantitative easing programme, though King knocked back calls for the programme to be used to buy assets other than gilts, saying such a decision could only be made by elected governments.
King also used his speech to call for an honest recognition of eurozone banking losses: ‘Until losses are recognised, and reflected in balance sheets, the current problems will drag on.
‘An honest recognition of those losses would require a major recapitalisation of the European banking system.’