THE government’s £20bn credit easing policy has run into a roadblock in part due to a demand by Brussels that the Treasury force banks to pay a minimum amount to participate.
The current model under consideration is also not viable for HSBC because it works by reducing banks’ wholesale funding costs – a source of liquidity that HSBC uses very little.
In the current version of the National Loan Guarantee Scheme, or credit easing, the government would underwrite a chunk of bank debt on the condition that they fully pass on the benefit to small businesses in cheaper loans. The lenders would also have to pay for the guarantee to ensure it is not a subsidy for them.
But HSBC funds its lending mostly out of customer deposits, so participating in the scheme would require it to issue more expensive debt that it would not normally sell.
The EU is also complicating the process by insisting that banks pay a minimum amount to join the scheme to avoid any potentially distortional effects on the economy.
And a source said that the guarantee is worth less to HSBC anyway because its wholesale funding costs and needs are already extremely low. That means that paying to participate could wreck the economics of the scheme for the bank.
The Treasury has to steer a tortuous course between highly prescriptive EU state aid rules, which even stipulate the maximum term for which funds can be offered, and banks’ requirements. And the government is anxious to launch the scheme at the budget on 21 March to cut the cost of credit as soon as possible.
As City A.M. revealed in November, banks pitched a range of alternative proposals for credit easing that did not involve using their balance sheets but which they claimed could boost small firm borrowing by £4bn. While supportive of the policy’s aims, bankers are sceptical about its impact.
The Treasury said it is still in “ongoing discussions” about the scheme.
