February 16, 2013 / 1:26 PM / 5 years ago

Britain's business minister urges rethink of lending scheme

COVENTRY, England (Reuters) - Britain’s business minister called on the Bank of England on Saturday to consider new ways to unblock the flow of credit to small companies in order to help the country’s sluggish economy.

Vince Cable said he had written to the number two at the central bank, Paul Tucker, seeking a discussion of possible changes to the Funding for Lending Scheme (FLS) which was launched last year.

The FLS is central to efforts by the British government and the Bank of England to snap the UK economy out of two years of stagnant growth after the financial crisis enfeebled many banks.

So far, the scheme has boosted mortgage lending but has not been a big help for small and medium-sized enterprises (SMEs).

“One of the questions for the immediate future is how Funding for Lending perhaps could be adapted to deal with the needs of SMEs,” Cable said.

“It’s quite a tricky technical issue and I have written to the deputy governor of the Bank of England to seek a meeting to see how we can address that, if we can.”

The scheme allows banks and building societies to access more than 80 billion pounds ($124.19 billion) in cheap finance if they maintain or increase net lending to households and businesses.

Cable, speaking to reporters after delivering a speech at an economics conference organized by the University of Warwick in the English Midlands, said any changes would have to be compatible with European Union rules that prohibit unfair state aid.

Cable said ideas proposed by former top BoE policymaker Adam Posen should be looked at, including the possibility of the central bank buying bundles of corporate loans which could help revive lending to companies, and not just government bonds.

“The governor has taken the view that anything other than rock-solid gilts are not appropriate to have as part of the balance sheet of the Bank of England,” said Cable, who is a senior member of the Liberal Democrats, which forms Britain’s ruling alliance with the Conservatives.

“I understand where he is coming from but that’s quite a rigorous - some critics might say rigid - view. More open-minded thinking about that would be helpful.”

King is due to retire in June and he will be replaced as governor of the Bank of England by Mark Carney, who is currently head of the Bank of Canada.

“Many people are looking forward to the advent of the new Canadian governor for possibly injecting some creativity into this currently log-jammed discussion,” Cable said, referring to the debate about what assets the Bank of England should hold.

($1 = 0.6442 British pounds)

Editing by James Jukwey

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