Lenders opposed to easing target
BANKS are urging the Treasury not to set a rigid target for its credit easing scheme because it risks “setting it up to fail”, a source involved in the discussions told City A.M..
In December, chancellor George Osborne laid out his plan to get credit flowing to small businesses by offering £20bn in debt guarantees to banks, so that they could pass on the benefit to small firms in cheaper loans.
But there is no clear sense of how to measure the effectiveness of the policy in the real economy.
A source involved in the discussions between banks and the Treasury said: “There is no incremental estimate for how much credit it will get into SMEs [small and medium-sized enterprises].”
Banks believe that if the Treasury sets a target for how much it wants to boost credit through the scheme, it risks going to the same way as the Project Merlin deal with lenders, in which the government trumpeted dubious targets that were then missed.
It is understood that if it does set a target, the Treasury is likely to favour one related to how much small firms’ borrowing costs have come down rather than a target based on how much more they have borrowed and invested as a result.
Any target will rely on banks’ estimates of how much they have cut the cost of each loan and could be sector-specific depending on what kind of firm is borrowing the money.
“We’re working out the details of how to measure the tangible effects of the scheme,” said a Treasury spokesman.
One option is for the Treasury to accept banks’ argument tacitly and simply stick with the very loose goal already stated of cutting SME credit costs by “up to 100 basis points”. But it could prove hard to measure success by that benchmark.