MS: Business Finance Guarantee Scheme

[Samuel Gallagher]

Statement by the Rt Hon John Glen, Economic Secretary to the Treasury:

Mr Speaker,

With leave, I should like to make a statement on the Business Finance Guarantee Scheme established by the Treasury.

One of the hallmarks of the current financial crisis is a slowdown in lending by financial institutions. Business, particularly small- and medium-sized enterprises, are acutely impacted by this restriction of credit.

In an effort to increase the rate of lending and boost investment in the economy, I am announcing the Business Finance Guarantee Scheme. Under this scheme, the Treasury will provide £50 billion in guarantees to stimulate up to £67 billion in lending by financial institutions.

The following structure will be applied to the scheme. The Treasury will partner with financial institutions lending to business to guarantee nearly £67 billion in new lending provided by financial institutions. Each loan shall be guaranteed at 75% of the value of the principal. This means that the Treasury will hold a maximum liability of £50 billion. Loans guaranteed in this scheme shall bear an interest rate equal to a fixed rate above the current Bank of England rate. Such a rate shall be set by the director of the scheme.

We have ensured that financial institutions will only receive guarantees equal to 75% of lending to business to ensure that lending is carried out in such a way the firms receiving financing will be responsibly selected. Financial institutions will share in the risk in order to prevent reckless lending.

Guaranteed loan books must be structured in such a way that, for every £5 guaranteed by the government, no less than £2 must be lended to small- and medium-sized enterprises. Participating financial institutions will be charged a commercial guarantee fee equal to 1% of their guaranteed loan book per year. For community financial institutions and small banks, this guarantee fee will be set to 0.5%.

Loans issued between September 1, 2008 and February 28, 2009 shall be eligible for inclusion in this scheme.

Mr Speaker, we view this scheme as being critical to improving lending in the current economic situation. Financing for business is critical to facilitating job growth and seeing business begin to grow again across the country.

I commend this statement to the House.

[Samuel Gallagher]

Addendum by the Rt Hon John Glen, Economic Secretary to the Treasury:

Mr Speaker,

With leave, I should like to revise and extend my remarks.

At this point the government has issued guidance that guarantees can equate no more than £10 million in financing per individual business in each banks' loan book. The director of the scheme shall have the authority to waive this criteria if deemed prudent.