Darling Said to Consider Credit Guarantees to Spur U.K. Lending

By Gonzalo Vina and Robert Hutton

Dec. 10 (Bloomberg) -- U.K. Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending, a person familiar with the plan said.

Darling is looking at a range of options to revive credit including whether to expand a 250 billion pound ($370 billion) Treasury program to support bank debt so that it covers mortgages and other loans, according to the person.

The measures would mark an unprecedented step by U.K. authorities to underwrite commercial loans after a rescue that gave the government stakes in HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Plc failed to restart bank lending. The economy is sinking into its first recession since 1991.

“It’s critically important that we get the banks lending again,” Darling told journalists in London yesterday. “Price is important, but so too is the availability of credit.”

Prime Minister Gordon Brown made increased lending and lower loan costs part of the “strings attached” to the 50 billion-pound bank bailout announced in October, which included the 250 billion pound credit line to back interbank lending.

Banks and building societies have failed to fully pass on Bank of England interest-rate reductions. Brown’s government hasn’t publicly discussed ways to revive lending if the cuts don’t work. John McFall, the Labour lawmaker who leads Parliament’s Treasury Committee, says Brown must consider the “nuclear option” of full nationalization of banks.

Rate Cuts

The average cost of a two-year fixed-rate mortgage fell by 0.71 of a percentage point to 5.11 percent in November, the Bank of England said yesterday. That’s less than half the 1.5 point reduction the central bank delivered on Nov. 6. It has since cut the rate by a full point to 2 percent, the lowest since 1951.

“Current policy objectives are conflicting and incoherent,” said Michael Coogan, director general of the Council of Mortgage Lenders, which represents banks. “Government needs to decide on its key priority. The tug of war with lenders being pulled in every direction needs to end.”

Banks approved 39,900 loans for house purchases in October worth 5.5 billion pounds, down 52 percent by volume and 57 percent in value from a year ago, according to the CML.

The Conservative opposition used the figures to amplify criticism of Labour’s handling of the credit crunch, saying the government should consider more guarantees to back up bank lending instead of threatening the banks with sanctions for not writing more loans.

Gap Narrows

Brown’s popularity has risen in recent weeks after his bank rescue and a 20 billion-pound fiscal stimulus announced last month.

A Populus Ltd. poll showed Labour at 35 percent, compared with 39 percent for the opposition Conservatives. The four-point gap compares with a 28 point Conservative lead in September.

“Gordon Brown’s big idea is falling apart,” said George Osborne, a Conservative member of Parliament who speaks on finance. “He needs to change his bank-rescue plan so it starts to rescue the economy, not just the banks, and set up a National Loan Guarantee Scheme to get vital credit flowing to businesses.”

Banks are shunning new lending as they rebuild their balance sheets, which were damaged by the global financial crisis. Housing sales fell by the most since 1978 last month, the Royal Institution of Chartered Surveyors said yesterday.

The average standard variable rate for mortgages at U.K. banks slipped to 6.39 percent last month from 6.91 percent, the Bank of England said.

Last week, HBOS,RBS and Nationwide Building Society trimmed their main mortgage rates by less than the one-point reduction announced by the Bank of England Dec. 4.

“We have got to look at the whole monetary transmission mechanism,” said Philip Hammond, a Conservative lawmaker. “We have got to look at the wholesale funding market, and the government may have to be prepared to intervene.”

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.netRobert Hutton in London at rhutton1@bloomberg.net