Bank Of England Offers Loans To Spark Economy

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UK bank stocks have risen strongly after the Bank of England pledged to offer new, low-cost loans to help protect them and also encourage lending into Britain's shrinking economy.

At a speech in the City of London (LSE: CIN.L - news) on Thursday night, the bank's governor Sir Mervyn King blamed the eurozone crisis for "exceptional circumstances" in which banks are struggling to borrow at affordable rates from international markets.

The Bank of England will respond by introducing a new "funding for lending" scheme to provide loans at a cheaper rate than international markets as long as banks use the money to provide credit to households and businesses.

Sir Mervyn said: "It would complement the Government's existing schemes, and tackle the high level of funding costs directly. It could, I hope, be in place within a few weeks."

In response, shares in part-nationalised Royal Bank of Scotland (LSE: RBS.L - news) (RBS) were the best performers on the FTSE 100 (Euronext: VFTSE.NX - news) - rising up to 8%. Lloyds Banking Group (LSE: LLOY.L - news) and Barclays (LSE: BARC.L - news) gained 4%.

But there was some scepticism.

Banking commentator Iain Anderson told Sky News: "Given the stresses in the system at the moment, this is going to have to be a very significant package to make a difference.

"We're going to have to see the detail, we're going to have to see the numbers before we can work out if it can make a difference."

Shadow chancellor Ed Balls argued the bank and the Treasury could not use the eurozone crisis as an excuse for the shift in policy.

He told Sky News it was an admission that the UK economy's recovery had been damaged by the coalition's lack of action to secure growth.

In his speech, the Chancellor outlined the Government's proposals to prevent future banking crises and protect depositors' and taxpayers' money in the event of a banking collapse.

George Osborne told City grandees in his Mansion House speech: "I believe that we have found a workable way to solve what I called the 'British dilemma' - protecting British taxpayers in a way that does not make the UK uncompetitive as a home of global banks."

New reforms to banking regulation, based on the recommendations of the Independent Commission on Banking, include splitting high street and investment banks to ensure ordinary savers' money is protected from risky investments going wrong.

Banks will also be forced to hold cash reserves worth 17% of the value of their business to help them keep trading in the event of a bank funding crisis such as that which led to the collapse or Northern Rock in 2008.

But British banks will not have to hold extra reserves on behalf of subsidiaries outside the European Economic Area provided their UK businesses are not be affected by the collapse of those subsidiaries.

The banking industry has resisted the reforms arguing they will push up the cost of doing business and that higher costs will have to be passed on to customers who have grown accustomed to free banking services.

Kevin Burrowes, UK financial services leader at PwC, said: "We all want a stable, highly competitive, customer focused UK banking sector.

"The very heavy burden of all this regulation and the management effort required to address it could potentially make our banks uncompetitive globally.

"The rapidly growing financial institutions from emerging markets will seek to exploit the opportunities this gives them."