Government to lower cost of Credit Guarantee Scheme

The Treasury is to lower the fees paid by participating institutions for use of the Credit Guarantee Scheme. This will make it cheaper for lenders to gain access to government guarantees that help them to gain access to wider market funding.

Lowering the cost of funding brings the scheme closer in alignment with schemes in other countries. 

Seven of the largest banks and one building society have access to the scheme and the government hopes this will support the banks’ ability to continue to extend credit to the economy.

The length of the guaranteed scheme is also being increased from three to five years, ending in April 2014. Within that, the three-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.

The government said the 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 Council of Mortgage Lenders welcomed the announcement and director general Michael Coogan commented: "The government now seems to be hearing the message that lenders cannot realistically deliver all that is expected of them under current conflicting expectations, and moving to address some of these. We welcome the Chancellor's acknowledgement that there is still more that the government can do to help try to facilitate more conducive conditions for lending."

The scheme is open for an initial period of six months. This, and the size of the scheme, will be kept under review. The scheme was originally approved by the European Commission on 13 October 2008 and the government will lower the fees once it has obtained the Commission’s approval.

The basic principle of the Credit Guarantee Scheme is to charge a commercial fee for a government guarantee, to ensure that the taxpayer is properly remunerated for the risk involved. The government expects that by the end of 2008 approximately £100bn of guarantees will have been made to participating institutions. In total, the government estimates participating institutions will issue £250bn of guaranteed debt.