THE Treasury is being urged to consider a radical new scheme that would see it hand government cash to banks so they can lend it to small firms, City A.M. has learned.
The plan, which has been raised in meetings between government ministers and bankers, has sparked the interest of Vince Cable (pictured) as well as backing from newer, smaller banks who are keen to get a foothold in the market.
If the government pursues the scheme, it could see hundreds of millions in taxpayer cash deposited in small-time banks and loaned to struggling small and medium-sized enterprises (SMEs) at below current market prices.
It comes as Chancellor George Osborne struggles to find ways to stimulate the economy. His lending deal with banks, Project Merlin, has had mixed success due to ongoing economic turmoil.
Under the new plan being presented to the government, the Treasury would redirect some of the cash it deposits in the Bank of England and larger lenders into either loans or deposits for newer, smaller banks. The small-time lenders would then commit to lending that cash onwards only to SMEs.
Business secretary Vince Cable told City A.M. that it was “a creative idea that we should certainly look at”, adding that he would be examining the proposal.
Aldermore Bank, a small bank set up in 2009, is making a bid to get between $75m (£47m) and $100m of Treasury cash deposited per month as part of the scheme.
Chief executive Phillip Monks said that the money could be loaned out at below current market rates: “If [getting] the government deposits were cheaper than retail deposits, we would pass that advantage on to SMEs.”
Philip George, co-managing director of Shawbrook Bank, a small-time lender that relaunched today, also supports it: “We have had our own discussions about it... The government wants to get money into SMEs and we would be keen to do that,” he said.
Metro Bank chief Craig Donaldson also said his bank would “certainly” be on board to participate.
Recently, Osborne unveiled a “credit easing” scheme to buy up private debt with the aim of creating a market in small business bonds. But the policy is not likely to have an impact for three-to-five years. Channelling government cash into SMEs through banks, by contrast, could feed it through much sooner.
It would likely prove controversial, however, because it would see taxpayers’ money put into potentially high-risk loans. If SMEs began to default at higher rates, government finances could be hit.
It is understood that the proposal was discussed a month ago at a closed-door meeting between bankers, Cable and Treasury secretary Mark Hoban.
“It was greeted with a high level of support from the chief executives,” said a source who attended the meeting. Those present were left believing that follow-up meetings are likely to be held on the matter.