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| Bank shares jump on new business support plans | Bank shares jump on new business support plans |
| (40 minutes later) | |
| Bank shares have jumped in the wake of plans from the Bank of England to launch two new stimulus packages. | Bank shares have jumped in the wake of plans from the Bank of England to launch two new stimulus packages. |
| The Bank of England's announcement of its plan, on Thursday, came in response to the worsening economic outlook, governor Sir Mervyn King said. | The Bank of England's announcement of its plan, on Thursday, came in response to the worsening economic outlook, governor Sir Mervyn King said. |
| Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies. | Together with the government, it will provide billions of pounds of cheap credit to banks to lend to companies. |
| Royal Bank of Scotland and Lloyds shares were up almost 4%, while Barclays was 2.75% higher. | Royal Bank of Scotland and Lloyds shares were up almost 4%, while Barclays was 2.75% higher. |
| Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence". | Banks will also have access to short-term money to deal with "exceptional market stresses". The chancellor said the measures would "inject confidence". |
| But Labour's Shadow Chancellor Ed Balls said the measure would not be enough to help without the Government also changing course on its austerity plans. | But Labour's Shadow Chancellor Ed Balls said the measure would not be enough to help without the Government also changing course on its austerity plans. |
| In his annual Mansion House speech, Chancellor George Osborne said the stimulus packages would "support the flow of credit to where it is needed in the real economy". | In his annual Mansion House speech, Chancellor George Osborne said the stimulus packages would "support the flow of credit to where it is needed in the real economy". |
| "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he said. | "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep," he said. |
| 'Ugly picture' | 'Ugly picture' |
| Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen. | Sir Mervyn, also speaking at Mansion House, said the eurozone debt crisis had pushed up funding costs in the banking sector, which in turn meant the cost of borrowing for businesses and individuals had risen. |
| The crisis had also created a "large black cloud of uncertainty" over the global economy, meaning companies and households were cutting back on spending. | The crisis had also created a "large black cloud of uncertainty" over the global economy, meaning companies and households were cutting back on spending. |
| Signs of a slowdown in China, India and other "previously buoyant emerging economies" added to the "ugly picture" and meant further action was needed, the governor said. | Signs of a slowdown in China, India and other "previously buoyant emerging economies" added to the "ugly picture" and meant further action was needed, the governor said. |
| The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets. | The Bank has already pumped £325bn into the economy through its quantitative easing (QE) programmes, under which it buys up government bonds. The idea is that the institutions that sell bonds to the Bank then use the money to buy up other assets. |
| However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE. | However, there have been criticisms that they have held on to the money, rather than spending it, undermining the effectiveness of QE. |
| Separately, a Bank of England survey found that the risk of a foreign government failing to repay its loans, or a recession, were still, by a wide margin, the top concerns of senior City executives. | Separately, a Bank of England survey found that the risk of a foreign government failing to repay its loans, or a recession, were still, by a wide margin, the top concerns of senior City executives. |
| The bank's half-yearly "systemic risk survey", of 73 banks, building societies, insurers and other financial institutions, found that these were still identified as the the two top risks to the health of the UK financial system. | The bank's half-yearly "systemic risk survey", of 73 banks, building societies, insurers and other financial institutions, found that these were still identified as the the two top risks to the health of the UK financial system. |
| It may not be Plan B - but Plan A is undergoing some fairly significant remedial work. | |
| In the wake of the billions poured into the economy through Quantitative Easing and Credit Easing, we now have two new schemes designed to pump yet more cash into UK plc. | |
| It underlines just how alarmed ministers have become over the unfolding eurozone crisis. | |
| What has added to the concern is the pace at which the crisis now appears to be unfolding. | |
| One Treasury minister noted that on Monday morning, everyone was relatively upbeat following the emergency bailout for Spanish banks. By Monday evening, everyone had been plunged into gloom once more after the markets gave the latest deal the thumbs down. | |
| The Treasury view is that there is now a dangerous mismatch between the pace at which the markets are moving and the arthritic response of eurozone leaders. | |
| The big fear? That not only does a eurozone meltdown risk snuffing out any UK recovery, but it risks consigning the British economy to years in the economic doldrums. | |
| Cheap loans | Cheap loans |
| Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending. | Rather than further QE to stimulate the economy, the Bank will now offer cheap loans to banks on the basis that they increase lending. |
| "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said. | "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times," Sir Mervyn said. |
| Sir Mervyn added that the 'funding for lending' scheme would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending. | |
| But Mr Balls told the BBC that the measure won't work - because Mr Osborne's approach to the economy had been flawed from the beginning: "If you fundamentally think that the reason why our economy is stalled is simply because of the supply of credit to banks you might think you could sort this with monetary policy. | But Mr Balls told the BBC that the measure won't work - because Mr Osborne's approach to the economy had been flawed from the beginning: "If you fundamentally think that the reason why our economy is stalled is simply because of the supply of credit to banks you might think you could sort this with monetary policy. |
| "The reason it's happened in Britain so much harder than other countries is because of the fiscal crunch the chancellor imposed on the economy two years ago, which has choked off our recovery before the eurozone crisis." | "The reason it's happened in Britain so much harder than other countries is because of the fiscal crunch the chancellor imposed on the economy two years ago, which has choked off our recovery before the eurozone crisis." |
| The move was not wholly embraced by business. | |
| Graeme Leach, the chief economist at the Institute of Directors, said: "The extended liquidity and funding for lending schemes are welcome, but limited. | |
| "The liquidity scheme will need to be massively expanded if break-up and contagion spread across the eurozone... But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost." | |
| Peter Hann, banking expert at the Cass Business School, said the measures would have been better applied shortly after the banking crash of 2008, adding that "right now, in a time of weakening confidence, changing confidence is not going to happen just by easing money". | Peter Hann, banking expert at the Cass Business School, said the measures would have been better applied shortly after the banking crash of 2008, adding that "right now, in a time of weakening confidence, changing confidence is not going to happen just by easing money". |
| The BBC's business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%. | The BBC's business editor Robert Peston said the scheme would be seen as successful if it increased bank lending by £80bn, or 5%. |
| The governor said he hoped the scheme would be in place "within weeks". | The governor said he hoped the scheme would be in place "within weeks". |
| Banking sector liquidity | Banking sector liquidity |
| The second measure he said the Bank would be introducing was a scheme outlined in December last year - called the Extended Collateral Term Repo Facility - to address a shortage of liquidity in the banking sector. | The second measure he said the Bank would be introducing was a scheme outlined in December last year - called the Extended Collateral Term Repo Facility - to address a shortage of liquidity in the banking sector. |
| This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash. | This will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash. |
| Further details of the short-term liquidity scheme would be announced on Friday, he said. | Further details of the short-term liquidity scheme would be announced on Friday, he said. |
| Conservative MP Andrew Tyrie, chairman of the Commons Treasury Select Committee, said the plans looked encouraging: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks." | Conservative MP Andrew Tyrie, chairman of the Commons Treasury Select Committee, said the plans looked encouraging: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks." |