The Bank of England has changed the rules to encourage business lending.
There was a key change in monetary policy last week announced by the Bank of England in their Bi-annual Financial Stability report. The main body of the report warned of on-going problems in the access of finance to the SME in the UK and global economic problems.
The Bank commented as follows:
‘In the early part of 2013, global growth prospects remained subdued, particularly in the euro area. In April, the International Monetary Fund (IMF) revised down slightly its forecast for 2013 world GDP growth to 3.3%. The revision was consistent with the pattern of downward revisions to global growth forecasts since 2007. The divergence between the United States and the euro area became more marked.
The US economy continued to grow at a moderate pace, with the level of GDP above its pre-crisis peak. But the euro area remained in recession, as balance sheet repair and tight credit conditions remained a drag on activity’.
Following the changes we have seen in recent weeks in terms of the collapsing Global bond prices, as reported in our recent article ‘New Financial Crisis NOW’, they went on to say:
‘For much of the period since the previous Report, prices of risky assets rose and balance sheets across the financial system strengthened. More recently, however, asset prices have fallen and financial markets have been volatile, reflecting shifting expectations of the path of monetary policy in some of the major advanced economies.
The outlook for financial stability is still clouded by risks from a weak and uneven global recovery, and imbalances in the euro area. In the near term, risks could crystallise if global long-term interest rates were to rise abruptly from current still historically low levels, or if credit spreads were to widen.
In light of the outlook for financial stability and the actions under way to enhance the capital adequacy of the UK banking system, at its June meeting the Financial Policy Committee (FPC) agreed the following new recommendations:
• The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), with other Bank staff, should provide an assessment to the FPC of the vulnerability of borrowers and financial institutions to sharp upward movements in long-term interest rates and credit spreads in the current low interest rate environment. They should each report back to the FPC in September 2013.
• In assessing the liquidity of banks and building societies, the PRA should employ, among other measures, the Liquidity Coverage Ratio (LCR) as defined in the EU’s implementation of the Basel standard. The minimum requirement should be set at an LCR of 80% until 1 January 2015, rising thereafter to reach an LCR of 100% on 1 January 2018. The PRA should consider whether any additional requirements are needed where there are idiosyncratic liquidity risks not captured by the LCR framework or where the adjustments to capital positions described in the existing capital recommendations have not been implemented’.
The other recommendations can be seen here.
What this means and how it is meant to increase business finance:
By enabling the big 4 banks to reduce their cash and cash-like assets by as much as 20%, the Bank of England is in effect saying to them ‘here is some more liquidity, go and lend it in the economy’.
Paul Tucker, The Banks’s deputy governor for financial stability aid, ‘ the FPC judges that some relaxation in liquidity requirements would strike the appropriate balance between achieving the resilience and reducing possible impediments to the supply of credit to the economy’.
The report highlighted the fact that lending to corporations had fallen by 25% since the third quarter of 2008.
It will be very interesting to see what, if any, difference this policy makes to the availability of funding to the SME and also how it might assist in the provision of much needed alternative funding solutions to business generally. Whilst it can be seen as a major policy change by the BoE, it has not been in the press much and the danger is that this new opportunity for the banks to provide more business finance solutions might just get lost in the ether.
Finding alternative funding
If the continuing lack of availability of funding is affecting your business, or you are seeking business finance solutions, please contact us. We are specialists in this field and can hopefully point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at firstname.lastname@example.org or on 0845 689 8750.
Image by: CW Creative Works