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Sean Garman: In defence of a national loan guarantee scheme

Sean Garman is a banker for a leading city firm and is in charge of policy and research communications for Conservative City Future. Here he seeks to rebut Andrew Lilico’s recent argument against the national loan guarantee scheme.

Britain is faced with the deepest economic crisis in sixty years. Profitable companies are going to the wall because banks will not allow them to borrow money, jobs are being lost and families are under stress. The National Loan Guarantee Scheme will insure loans to save well-performing companies which will save jobs and create financial security for British families.

Andrew Lilico has attacked the Conservative plan for reviving commercial lending as “terrible”. In his post, Andrew goes on to describe in vivid detail the problems that he sees with insuring business loans with the Government ultimately determining who gets loans and who does not.

This is wrong for many reasons.

Firstly, the key issue in the economy is how to get credit moving again. The credit crunch has lead to a hyper crunch after the collapse of Lehman and now we are in recession. The length and severity of this recession will depend on whether the banks resume normal lending. We must advocate effective policies to avoid a deeper recession and to attack the cause of the current problem.

Secondly, an insurance scheme does not mean that the taxpayers will be immediately liable. Andrew claims that banks could collapse because of bad loans. This is true if a very large number of loans go into default for a particular bank. With nationalisations and capital injections this risk is significantly reduced. However, the Loan Scheme will ring-fence insurance premiums paid to ensure that if and when the insurance for default kicks in, the money will be coming from the ring-fenced premiums and not from the budget.

Thirdly, this scheme will help restore the partially broken link in monetary policy. The various banking groups will be more prepared to lend money to businesses by reducing their exposure and loss at default. Further, by lending money to businesses (including the restoration of overdrafts) at competitive rates, we can feel the full positive effect of the monetary activity undertaken by the BoE.  Lower rates passed onto tracker mortgages on the one hand, and a restoration of lending and overdraft accounts to commercial clients on the other.

The key issue is to determine who shall receive the loans. This scheme will require proper due diligence to be carried out. This is the problem with the regulators at this moment. They are held in such low esteem that the banks would ask for the regulators to insure poor loans without giving them proper due diligence of those loans.

Therefore, the national loan scheme must carry out proper due diligence. Auditors must provide reports on the banks to ensure that their risk management practices are not being altered to provide underperforming loans to the government to be insured. Banks must provide a Conservative Government with the risk rating of the loans that are to be insured, and to provide additional assurance that their ratings checks are adequate. This reduces the risk that poor loans will be insured after being put to the government by unscrupulous banks.

We are facing a prolonged period of reduced credit in an economy built upon credit. We are seeing good businesses who use their overdraft account between paying suppliers and being paid by customers go to the wall because that overdraft account has been severely cut back. This policy is about restoring lending to the commercial sector to reduce job losses and the severity of the recession.

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