Multi-billion plan wins backing of UK banks

Britain’s banks today backed a multi-billion pound scheme to prevent a second credit crunch even as City and industry experts warned there is no guarantee the plan will kickstart lending.

The co-ordinated action by the Bank of England and Treasury will see an estimated £80 billion offered to banks on condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

Banking shares soared at the prospect of the cheap loans. Royal Bank of Scotland was up nearly 8 per cent at 247.6p, adding about £1 billion to its market value.

Lloyds and Barclays, the other banks with the greatest domestic focus, were up 5 per cent and 4 per cent respectively.

However, there were warnings that the scheme will not address the core problem of companies’ reluctance to borrow, particularly in the face of a deepening eurozone crisis.

Graeme Leach, chief economist at the Institute of Directors, said: “The funding for lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing. But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow, regardless of the cost.”

The Bank of England also activated facilities for an emergency scheme that offers six-month liquidity to banks. The two measures are estimated to be worth around £100bn. The British Bankers’ Association said it was “ready and willing” to get behind the moves.