Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit amid a deteriorating outlook in the euro area.
The U.K. central bank will activate an unused plan to inject at least 5 billion pounds ($7.8 billion) a month into the financial system. Another plan will allow lenders to swap assets with the central bank in return for money to be lent to companies and households. The Treasury will indemnify the bank for any losses.
“We are not powerless in the face of the euro-zone debt storm,” Osborne told financiers in his annual Mansion House speech in London today. “The government -- with the help of the Bank of England -- will not stand on the sidelines and do nothing as the storm gathers.”
The plans mark a departure for the central bank, which has so far resisted calls for targeted measures to boost lending to the non-financial sector. Deputy Governor Paul Tucker, a contender to become governor when King’s term ends next year, signaled this week that the bank had eased its stance.
The liquidity plan seeks to help banks alleviate the strains resulting from the crisis in the euro area. Originally established in December, the program has never been used. The bank will announce details of its operation tomorrow.
The separate “funding for lending” plan comes on top of a Treasury credit-easing program and will be operated by the central bank for four years. Banks will be allowed to swap assets with the central bank at monthly auctions and use that money to lend to households and companies. The Treasury said a 5 percent increase in lending would inject about 80 billion pounds into the economy. Further details on how the plan will operate will be announced in the next few weeks, the Treasury said.
‘Rolling Up Our Sleeves’
“We are rolling up our sleeves and doing everything possible to protect British families and firms,” Osborne said.
King was the first senior British policy maker to conclude in 2008 that the financial system was facing potential insolvency, not merely a crisis of liquidity, and resisted calls to flood the markets with cash. His stance at the time rankled with government officials.
The shift comes as Osborne begins his search for a successor to replace King next year. Two people with knowledge of the matter said in February that Osborne is considering looking outside the Bank of England for a replacement.
Weighing on prospects for a bank insider this time is a series of clashes between the incumbent and the Treasury since the start of the financial crisis. Former Chancellor Alistair Darling wrote in his memoir of his difficult relations with the “incredibly stubborn” King, whom he considered not reappointing for a second term.
Osborne today coupled his commitment to cutting the budget deficit and strengthening banks with an emphasis on growth as he announced plans to expand the remit of the central bank’s Financial Policy Committee, which monitors financial stability.
“I will make it a legal requirement for the FPC to report, for every action it takes, how that action is compatible with economic growth as well as stability,” Osborne said.
Osborne also repeated his support for a banking union in the euro area to act as a backstop for the single currency. He called for common bonds and for Germany to support weaker economies in the 17-nation bloc.
Britain will not take part in any of the mechanisms to support the euro, Osborne said.
“British taxpayers will not stand behind euro-zone banks, and British voters want the British authorities to be in charge of supervising our own banks, especially in a crisis,” he said.