Guido’s main concern about the Tory plan to insure bank-to-business lending was that it would encourage risky lending in a failing economy. The lenders would not really have to worry too much about the risk because the taxpayer would pick up the tab. The government’s scheme will provide banks with guarantees covering 50% of the risk on existing and new working capital up to £20 billion. It shares the risk between the banks and the taxpayer, encouraging the banks to lend for the same profit for half the risk. This is in some ways smarter than the Tory plan.
The small business component is for a £1.3 billion of bank loans with a government guarantee of 75% to cover working capital. Presumably this is to reflect the riskier nature of small business lending. This is a drop in the ocean and will barely be noticed.
We are six months into the credit crunch. The options were admittedly not very palatable. Why did it take so long to put a plan into place? Could it be Mandelson wanted to get the politics right to fit his timetable of spin? No rush..