LONDON (MNI) – Bank of England Governor Mervyn King believes that
it is the Treasury’s and not the Bank of England’s duty to come up with
new ways to boost credit flow to small and medium sized enterprises.

King denied media reports that the BOE had rejected Treasury
requests to do more to get credit flowing to the key job-creating parts
of the economy. He said that he had not to date heard of any credible
scheme through which the BOE could boost SME lending.

The issue of how to increase the flow of credit to businesses which
cannot access capital markets is a vexed political question. In his
evidence, King stuck firmly to the view that the Treasury can help solve
the problem through fiscal measures, including by ordering the banks it
has large stakes in to crank up their lending to SME as the BOE does not
have the tools needed to do the job, King said.

The BOE Governor said quantitative easing, based on the BOE buying
large amounts of gilts, did provide some support to SMEs.

“Any action of a monetary kind that will stimulate demand and
spending in the economy will have helped SMEs,” he said.

“It didn’t tackle directly the problem of bank finance to SMEs. But
certainly by helping the economy it will help SMEs,” he added.

The solution, however, has to lie with the commercial banks, King
said.

“If you want to help SMEs obtain finance you need to go straight to
that bank channel, because banks have the infrastructure to assess the
credit risks of SMEs,” he said.

UK banks have been under intense market pressure to reduce the size
of their balance sheets and the cost of funding has remained high, so
they need extra incentives to expand SME lending.

“The measures needed to tackle it (shrinking SME lending) have to
be measures that are directed particularly on finding incentives for
banks to lend specifically to SMEs,” King said.

“That is something which is appropriate for the government to do.
They have instruments to do it which we don’t – fiscal incentives to
persuade the banks to lend to SMEs or, indeed, direct ownership of some
of the biggest lenders,” he added.

He poured scorn on the idea that the BOE could step into the breach
and was dismissive of MPC member Adam Posen’s idea of setting up a
state-owned investment agency,

“I am still waiting to hear of a credible scheme which we can carry
out and which would actually change the incentives of banks to lend to
SMEs,” King said.

Asked about Posen’s idea he said that “It would take a long time to
set up.”

“If you want to set up a new bank, a state bank, by all means do it
but, frankly, the way our bureaucracy operates I would be very surprised
to see any action on that within 18 months,” King added.

–London newsroom 0044 20 7862 7491; email:
drobinson@marketnews.com/wwilkes@marketnews.com

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