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Exclusive: Banks Face Lending 'Shame'

(c) Sky News 2012

Britain's banks face being named and shamed over their lending activities as part of a scheme designed to jump-start the flagging economy, I have learned.

I understand that league tables showing the extent of banks' participation in the Government's new 'funding-for-lending' scheme are likely to be published every three months under proposals drawn up by the Bank of England and the Treasury.

The 'name and shame' idea has been under discussion for several weeks, according to people involved in the talks. I'm told that Treasury officials and George Osborne, the Chancellor, have been pushing hard for it to be included in an attempt to spur an increase in bank lending.

The scheme will be launched by the Bank of England today.

Its (Euronext: ALITS.NX - news) structure, which officials say could generate an additional £80bn of lending by major banks, will enable them to access cheap funding using the Government's balance sheet.

Banks will pay an interest rate of just 0.25% on the funds they access if they increase their UK lending activity between July 1 this year and January 1, 2014.

However, I understand that if their lending activity decreases, the cost of the 'funding-for-lending' programme will rise on a sliding scale, with banks paying 1.5% interest if they lend over 5% less to UK customers during that 18-month period.

Mr Osborne's latest initiative to spur lending follows the poorly-received Project Merlin, which set firm targets for lending to small and medium-sized companies (SMEs).

Although the banks almost met their overall target for lending to SMEs in 2011, the scheme was criticised for doing too little to help revive the economy.

The National Loan Guarantee Scheme - or credit easing, as it has also been called - has also been panned by bankers who say they have been left unable to participate because of its terms.

Senior (Xetra: 852271 - news) bank executives tell me that 'funding-for-lending' has a greater chance of delivering the Government's objective of growing their lending than its predecessor projects so long as the City regulator delivers promised measures to allow them to free up balance sheet capacity.

The flip-side, though, is that they tell me they have warned Mr Osborne that the structure of the latest initiative risks triggering an increase in risky lending activity.

"There is a danger that it will mean lending more to customers who are not credit-worthy," one executive said.

Banks which access the funds will have to demonstrate that they are funnelling it to British customers, although people briefed on the scheme say that there will not be specific targets for lending to small business customers.

And there are warnings that while it will address the supply side element of bank lending, it won't tackle the lack of demand among customers to take on new borrowings.

The big UK lenders are also concerned that it will do little to aid corporate lending without a change in the rules because of the way loans to companies are treated from a capital perspective.

Mr Osborne announced the development of the funding-for-lending programme in his Mansion House speech last month.