Credit Policy, Banks and TheState of the UK EconomyA2 Macro – May 2013
Credit Policy – An Important Lever• Conventional monetary policy economics focuseson the effects of– Changes in market interest rates for borrowers andsavers– Changes in the base supply of money in the economy– Changes in the external value of a country’s exchangerate• Credit policy is becoming hugely important inmany countries – affecting growth / recovery– Especially policies that impact on credit supply– Policies on reforming the banking system
Interest Rates and Economic GrowthDeep cuts made in interest ratesto avoid a depression andsupport a recovery in aggregatedemand – but growth hasremained weak / fragile
Interest rates and investmentCapital spending bybusinesses has failedto respond toexpansionarymonetary policy
Bank LendingThis chart is telling – it shows a dramaticdrop in the annual rate of growth ofcommercial bank lending to businesses– the credit squeeze has had a bigimpact on the availability of financeEvaluationIs the drop inlending mainly dueto a squeeze oncredit supply or adrop in demand forloans?
Interest Rates on LoansThere has been a growing gap betweenthe cost of unsecured loans and overdrafts and the official policy interest rateset by the Bank of England
Limited Credit Supply• Banks have lowered theirwillingness to take risks– Rise in non-performing loans(bad debts) which havecontributed to heavy losses– Total loan write-offs wereover £11bn in 2012– Higher deposits and tougherchecks to get a mortgage• New (tougher) global rules(known as Basel III) on theamount of capital andliquidity that banks must holdKey Point:The credit crunch has led to acontraction in the supply offresh loans to businesses andconsumers
Overcoming Credit Crunch 2.0• Funding for Lending Scheme - August 2012• A subsidy for banks who lend to businesses• Banks can apply to get cheaper funds from the Bank ofEngland than they would if they went to the wholesalemoney market to get their funds for future loans• From 2014 banks will be able to draw down £5 of cheaploans from the Bank of England for every £1 in net newlending to SMEs (small and medium sized enterprises)• Green Investment Bank (joint venture with Qatar)• British Business Bank set by Vince Cable• Measures to encourage more competition in theretail banking industry
Business Finance – Old....Traditional Bank Finance• Commercial bank loans• Overdraft facilities• Credit card financeespecially for SMEs• Equity raised through stockmarketSMEs have built up their savings depositsin banks but have found it much tougherto get the loans they want .... Newfinance streams needed
Business Finance..... And NewGrowing Financial Options• Corporate Bond Marketincluding retail bonds• Peer to peer funding– Funding Circle– Zopa– Crowd Cube• New banks– Aldermore– Virgin Money– Possible new regional banks• Invoice discounting facility
Business Finance..... And NewGrowing Financial Options• Corporate Bond Marketincluding retail bonds• Peer to peer funding– Funding Circle– Zopa– Crowd Cube• New banks– Aldermore– Virgin Money– Possible new regional banks• Invoice discounting facilityRetail BondsTesco raised £125m in February withan eight-year bond paying 5.2% a yearJohn Lewis raised £50m in Aprilthrough a Partnership bond, thoughthis was reserved for its customers andstaff.Hotel Chocolat raised £4m by sellingthe bond to members of its ChocolateTasting Club, who dont get interestbut instead receive a box of chocolateeach month
Peer to Peer FundingConventional bank lendingto business in the UKcontinues to decline.
Peer to Peer FundingWhere people lenddirectly to others viaonline exchanges
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