Give us the cash: what will it take to get credit flowing again?

Illustration: David Lyttleton

Of the many sins businesses can accuse the government of committing in its response to the credit crisis, idleness is not one of them. Since last autumn, ministers have announced a dozen initiatives to rescue Britain’s banks, to encourage them to lend and bring relief to cash-strapped companies.

After the collapse of Lehman Brothers sent panic through the markets and spooked lenders to hold on to their cash, the government knew it had to intervene. Its £37bn recapitalisation of three of the UK’s largest banks ­ following the full or partial nationalisation of Bradford & Bingley and Northern Rock ­ was the most dramatic state intervention in a generation.

That scheme was copied around the world and prime minister Gordon Brown was even hailed as the saviour of the world’s financial system by Paul Krugman, the current economics Nobel Laureate. As Michael Saunders, a senior economist at investment bank Citi, says, “For last October’s package, the test of success was relatively clear ­ would the banks close?”

By January this year, it was clear that, while the banks were still alive, they were not lending to companies in anything like the volumes needed to revive economic growth. Within five days, the government announced two fresh packages of measures, one aimed at boosting lending to small- and medium-sized businesses and the other effectively a second bailout of the banks.

Critical timing
For Alistair Darling, the banking package could not have come at a worse time. Even as he was speaking in the House of Commons, bank shares were being pulverised. Royal Bank of Scotland hit 10p a share, compared with a 2007 peak of 591p.

The Treasury package contained no fewer than seven key elements:
• A new government guarantee for new asset-backed securities to encourage banks to re-enter the money markets and raise cash;
• A £50bn facility funded by the Treasury to enable the Bank of England to buy corporate loans and bonds from the banks;
• Extending the Bank of England programme to swap illiquid assets for cash from a month to a year;
• Extending a credit guarantee scheme aimed at guaranteeing up to £250bn of new bank debt;
• A new scheme under which the Treasury will insure certain bank assets, for a commercial fee, against losses on banks’ existing loans;
• A u-turn on the policy of shrinking Northern Rock’s loan book and a purchase of £5bn of interest-bearing shares in RBS to cut its payments; and
• Clarification that banks need a capital-to-assets ratio of 4% ­ rather than 8% ­ to comply with Financial Services Authority (FSA) rules.

Removing barriers
The Chancellor said the aim was to remove the barriers to lending, adding that the Treasury would demand “binding commitments” from banks to lend. There was a similar message from business secretary Lord Mandelson when he unveiled a £12bn package of loan guarantees aimed at the SME sector. “Some companies are struggling to secure the finance they need due to tougher credit conditions,” he said. “It is crucial that government acts now to provide real help to support them through the downturn.”