Osborne Credit Easing Backed By Major U.K. Banks Except HSBC

Chancellor of the Exchequer George Osborne
George Osborne, U.K. chancellor of the exchequer. Photographer: Simon Dawson/Bloomberg

Chancellor of the Exchequer George Osborne won the backing of all except one of Britain’s major banks for his credit-easing plan that aims to funnel cheap loans to small and mid-sized companies.

HSBC Holdings Plc abstained from the first 5 billion pound ($8 billion) tranche of the 20 billion-pound National Loan Guarantee Scheme. Barclays Plc, Royal Bank of Scotland Group Plc, Lloyds Banking Group Plc and Banco Santander SA said they would sign up to the plan that uses the government’s lower borrowing costs to get loans to companies, the Treasury said.

“The government promised to help small businesses get access to lower interest rates,” Osborne said in a statement released by his office in London. “Today, we deliver on that promise.”

Osborne is facing growing pressure to stimulate growth amid a slowdown triggered by the debt crisis in Europe and his unprecedented budget-cutting program. Credit easing seeks to supplement the Bank of England’s 325 billion-pound quantitative-easing program, whereby the central bank buys bonds with newly created money. Four years after the global financial crisis erupted, small businesses continue to complain that banks are reluctant to lend or do so at prohibitive interest rates.

RBS, Lloyds, HSBC, Barclays and Santander U.K. collectively lent 214.9 billion pounds to business, 13 percent more than a target agreed on with the government last year under the Project Merlin deal.

Still, lending to small and medium-sized companies, defined as those with revenue of less than 25 million pounds annually, fell 1.1 billion pounds short of the 76 billion-pound target. That was a “disappointing” result, U.K. Treasury minister Mark Hoban said in February.

Credit easing allows for the government, which can borrow money more cheaply than banks, to underwrite the lending so that lenders can pass on those lower costs to companies.

Cheaper Loans

The plan, available to companies with less than 50 million pounds in annual sales, would reduce loan costs by about 1 percentage points compared with loans currently provided by commercial banks. Banks rather than the government will chose to whom they lend.

HSBC won’t participate in the first tranche of the program, two people with knowledge of the situation said yesterday.

The bank uses little wholesale funding and relies on deposits to lend, said one of the people. The government’s proposal would penalize the bank for this model and be less profitable, the person said. HSBC hit its 2011 target for lending in the U.K. under last year’s government-sponsored plan.

Meanwhile, RBS, Lloyds, Barclays and Santander said in separate statements that they will all take part.

‘Vital Ingredients’

“The scheme’s real benefit will come through its potential to rekindle confidence, stimulate demand and encourage investment -- all of which are vital ingredients of recovery and growth,” said John Maltby, who heads commercial banking at Lloyds.

Barclays said it would give clients the reduction in loan costs the program will provide as a lump sum at the beginning of the loan, promising it won’t profit from the plan.

RBS said it is “determined to send a message to small firms that RBS is open for business and that cost will not be a barrier to getting the loans they need.”

Santander U.K. said “many businesses remain keen to invest and grow and we are committed to helping them to build the right capital structures to do so.”

The loan guarantee plan mirrors practices used by the European Investment Bank and Germany’s KFW Group.

HSBC’s loan-to-deposit ratio for 2011 fell to 75 percent, meaning the bank loaned 75 pounds for every 100 pounds it took as deposits, from 78 percent in 2010. RBS said its loan-to deposit ratio was 108 percent for 2011, and Lloyds’s was 135 percent.

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