At the autumn statement, the Chancellor of the Exchequer announced a package of measures designed to ease the flow of credit to smaller businesses. The national loan guarantee scheme (NLGS) was one of these measures. Under the NLGS, the Government will allow eligible banks to issue limited quantities of Government-guaranteed debt, up to a total of £20 billion. Banks will be required to pass on the resultant reduction in funding cost through a reduction in the interest rate (by 1 percentage point) charged on new loans to small businesses: businesses with turnover of less than £50 million per annum.
The scheme constitutes state aid to participating banks and to small businesses, which the European Commission approved on 14 March 2012; the approval statement can be found by following the web link to this footnote1.
However, the scheme is designed in such a way that banks do not retain any benefit; that means the reduction in the cost of borrowing from the Government-guaranteed debt is either passed on to the small businesses or paid to the Exchequer in the form of a fee. Details on the design of the scheme are published today; please follow this link for further information http://www.hm-treasury. gov.uk/nlgs.
In setting up this guarantee scheme, the Government are relying on their statutory powers derived from Section 228 of the Banking Act 2009. As indicated in the autumn statement of the Chancellor of the Exchequer, the £20 billion would not be an additional contingent liability for HM Treasury, as it was previously recorded when the Bank of England asset purchase facility was set up.
As such, this is an effective transfer from the corporate operations of the asset purchase facility, a subsidiary company of the Bank of England with an explicit guarantee from HM Treasury, to the balance sheet of HM Treasury.
1http://europa.eu/rapid/pressReleasesAction.do? reference=IP/12/244&format=HTML&aged=0& language=EN&guiLanguage=en