The UK Government is today announcing proposals for changes to the Credit Guarantee Scheme. These changes are designed to enhance the effectiveness of the Scheme in supporting stability in the financial sector and maximise its impact on wider economic stability through supporting lending to the economy. They draw on experience gathered over recent weeks of operating the scheme and follow discussions with participating banks.
Taking account of international experience, and market developments (in particular the falls in bank risk premia), the Government is adjusting the formula that determines the fees paid by participating institutions for use of the Government guarantees. This will lead to those institutions paying a lower - but still commercial - fee for use of the Scheme, reducing their cost of funding under the scheme, and more closely aligning the scheme with those in other countries. This in turn will support their ability to continue to extend credit to the economy. The Government will, through the Lending Panel, ensure that this is reflected in the terms and availability of credit to households and businesses.
To enable participating institutions to better manage the transition from guaranteed to wholly unsupported funding the government will also lengthen the scheme, from 3 to 5 years, ending in April 2014. Within that, the 3 year maximum term of individual instruments will be retained, with some flexibility to roll them over as agreed with the Treasury. At present the Scheme guarantees borrowing in Sterling, Euros and US Dollars. In future they will also be able to borrow in a wider range of currencies, further extending the investor base in UK banks and building societies.
These changes will enable banks and building societies to borrow from a diverse range of investors, improve their financial positions, and therefore pave the way for them to lend to the economy.
The Scheme is open for an initial period of six months. This, and the size of the Scheme, will be kept under review. These proposals vary the Scheme as approved by the European Commission on 13 October 2008 and are subject to the Commission's approval under the State Aid rules. The Government has informed the European Commission of these proposals and will bring forward changes to the rules of the Scheme to implement these proposals once it has obtained the Commission's approval.
