The credit will be provided by the Treasury through an arm’s-length operation direct to companies, with the Bank of England acting as the Treasury’s agent. Under the scheme, the Treasury will buy small firms’ corporate bonds, providing cash direct to struggling firms unable to gain funds from the banks.
The initiative is separate from the quantitative easing by the Bank of England which is, in effect, the printing of money. Ministers also view the credit easing as a medium-term way of developing a US-style credit market for small and medium-sized firms that does not depend on banks.
The proposal – an admission that banks are still not lending properly – represents a major step by the Treasury and brings it closer to direct involvement in monetary policy, formerly the sole preserve of the Bank.
The move was presented as a sign that the Treasury is responding to events in a way that does not involve abandoning deficit reduction. Officials insisted the move did not represent a state bank or the start of the government picking winners.