All-party parliamentary group on economics, banking and finance chair Steve Baker says the Funding for Lending scheme should be scrapped.
Baker, who is also co-founder of banking thinktank the Cobden Centre, says the Government is guilty of “intellectual inconsistencies” for trying to increase lending in the midst of a debt crisis.
Giving evidence to the Treasury select committee yesterday, Bank of England executive director Paul Fisher said although the scheme could lead to more than the £80bn of new lending the Government hopes for, he would “grab” that now as a result of the scheme because lending has been “flat over the past three years”.
Conservative MP Baker says: “It may well increase lending but we are in a debt crisis and there is lot of intellectual inconsistency here. We are in a debt crisis because people over-borrowed. So what we are going to do is come up with state interventions to increase lending, for which read borrowing.
“Really, what we need to do is deleverage. It is going to be a painful process. No one is going to like it, except savers who will see interest rates going up in due course. All of the institutions of Government should get out of the market for credit, they are making the situation worse not better.”
Under the scheme, the Bank of England will lend UK Treasury bills to lenders for up to four years for a 0.25 per cent fee per year, increasing by 0.25 per cent for each 1 per cent fall in net lending to a maximum of 1.5 per cent.
Lenders deposit collateral with the BoE as a security and, according to the Bank, can then use the Treasury bills to access money at “rates close to Bank rate”. Each lender can access up to 5 per cent of its existing stock of loans to SMEs and households and are incentivised to boost lending because every pound of additional lending would be eligible for the scheme.
Baker says: “Guarantee schemes just become another subsidy for bank and socialising risk of business lending and getting banks to make loans they would not otherwise make is just another distortion of a market economy and I am afraid it is going to be counter productive.”