King urges Government to offer incentives for Banks to lend

Johnson Reed
1m read

Mervyn King, governor of the Bank of England, has urged the government to set incentives for banks to boost the amount of lending to cash-tight small and medium sizes businesses.

King has been questioned by members of the parliament’s Treasury Select Committee on the central bank’s decision to buy only gilts, rather than other assets as part of the substantial £75 billion quantitative easing programme launched on October 6th.

However King argued that the Bank of England shouldn’t take the decision to lend to individual companies or sectors, and said the lack of lending to smaller firms was the government’s issue to tackle. He said:

Measures that are directed particularly on finding incentives for banks to lend specifically to SMEs … is something which is appropriate for the government to do, and they have instruments to do it, which we don’t.

Fiscal incentives can persuade banks to lend to SMEs, or use of direct ownership of the biggest lenders.

Despite the Government and the five largest banks agreeing a deal in February, the so-called “Project Merlin” has so far had very little impact.

A plan to funnel loans to small and medium sized companies through “credit easing” was revealed by Chancellor George Osborne in October, although there have yet to be any details released by the Treasury.