The International Monetary Fund has warned governments to resist the temptation to relax credit standards to boost growth as it highlighted the UK's lack of lending to small businesses.
The global lender of last resort, which helped rescue Ireland, Portugal and Greece from bankruptcy, said policymakers need to weigh the short-term benefits of relaxing credit standards against the potential for a repeat of the 2008 lending bubble.
The warning comes less than a week after Conservative leader David Cameron pledged to bring forward the coalition's Help to Buy mortgage support scheme, that critics say could spark a surge in house prices ahead of a devastating crash.
The IMF said banks remained in a weak state across much of the developed world and a stumbling block to economic growth, which depends on a flourishing and competitive market for commercial and mortgage loans.
In its biannual global financial stability report, the Washington-based lender said it was tempting for governments to allow central banks to support lending and for ministers to relax lending rules to boost growth, but the costs over the longer term could be high.
Echoing a similar warning by Bank of England official Paul Fisher in a speech earlier on Wednesday, the IMF said: "When credit policies work well to support credit growth and an economic recovery, financial stability is enhanced, but policymakers should also be cognisant of longer potential risks to financial stability.
"The main risk centres on increased credit risk, including a relaxation of underwriting standards and the risk of 'evergreening' existing loans," it said. The IMF, which counts the UK among its chief financial backers, is always wary of criticising member governments directly.
In recent reports analysing the UK's economic situation, it has pointed out that the chancellor, George Osborne, could increase spending on infrastructure to boost growth.
It has also hinted strongly that the UK's central bank could follow the US Federal Reserve and offer more direct support to the main high-street lenders, primarily by buying some of their mortgages.
Osborne has encouraged the Bank of England to take a more interventionist role to support lending following his £85bn Funding for Lending Scheme and the more recent Help to Buy, which could underwrite £130bn of mortgages.
However, the initiative has yet to boost the credit used by small business. The IMF said: "The UK authorities adopted a number of measures to boost credit, but their effectiveness has yet to be demonstrated.
This could be due to the relatively short period during which they have been in place." Figures from the Bank of England on Monday showed mortgage approvals jumped to their highest since 2008, which is largely credited to the FLS, which provided banks with cheaper funds than available on the international money markets, and Help to Buy.
However, lending to non-financial businesses fell in August and was down 3.6% year on year, supporting figures from the Office for National Statistics, which showed business investment fell 2.7% in the second quarter.
The IMF said its preliminary review of business lending in the UK revealed that business were more concerned about the demand for their goods and the prospect of weak economic growth than the cost of credit.
"If this were to be confirmed through additional, more detailed analysis, then policies that support demand may be more effective in boosting credit."
Keynesian economists have long criticised the IMF for backing moves by member governments to tackle supply-side reforms, including making credit easier, in opposition to calls for boosts to public spending to increase the demand for goods and services.
These critics, including Princeton University's Paul Krugman, have argued that both the supply of credit and policies to increase demand are needed to recover from a deep recession and financial crisis.
theguardian.com
The global lender of last resort, which helped rescue Ireland, Portugal and Greece from bankruptcy, said policymakers need to weigh the short-term benefits of relaxing credit standards against the potential for a repeat of the 2008 lending bubble.
The warning comes less than a week after Conservative leader David Cameron pledged to bring forward the coalition's Help to Buy mortgage support scheme, that critics say could spark a surge in house prices ahead of a devastating crash.
The IMF said banks remained in a weak state across much of the developed world and a stumbling block to economic growth, which depends on a flourishing and competitive market for commercial and mortgage loans.
In its biannual global financial stability report, the Washington-based lender said it was tempting for governments to allow central banks to support lending and for ministers to relax lending rules to boost growth, but the costs over the longer term could be high.
Echoing a similar warning by Bank of England official Paul Fisher in a speech earlier on Wednesday, the IMF said: "When credit policies work well to support credit growth and an economic recovery, financial stability is enhanced, but policymakers should also be cognisant of longer potential risks to financial stability.
"The main risk centres on increased credit risk, including a relaxation of underwriting standards and the risk of 'evergreening' existing loans," it said. The IMF, which counts the UK among its chief financial backers, is always wary of criticising member governments directly.
In recent reports analysing the UK's economic situation, it has pointed out that the chancellor, George Osborne, could increase spending on infrastructure to boost growth.
It has also hinted strongly that the UK's central bank could follow the US Federal Reserve and offer more direct support to the main high-street lenders, primarily by buying some of their mortgages.
Osborne has encouraged the Bank of England to take a more interventionist role to support lending following his £85bn Funding for Lending Scheme and the more recent Help to Buy, which could underwrite £130bn of mortgages.
However, the initiative has yet to boost the credit used by small business. The IMF said: "The UK authorities adopted a number of measures to boost credit, but their effectiveness has yet to be demonstrated.
This could be due to the relatively short period during which they have been in place." Figures from the Bank of England on Monday showed mortgage approvals jumped to their highest since 2008, which is largely credited to the FLS, which provided banks with cheaper funds than available on the international money markets, and Help to Buy.
However, lending to non-financial businesses fell in August and was down 3.6% year on year, supporting figures from the Office for National Statistics, which showed business investment fell 2.7% in the second quarter.
The IMF said its preliminary review of business lending in the UK revealed that business were more concerned about the demand for their goods and the prospect of weak economic growth than the cost of credit.
"If this were to be confirmed through additional, more detailed analysis, then policies that support demand may be more effective in boosting credit."
Keynesian economists have long criticised the IMF for backing moves by member governments to tackle supply-side reforms, including making credit easier, in opposition to calls for boosts to public spending to increase the demand for goods and services.
These critics, including Princeton University's Paul Krugman, have argued that both the supply of credit and policies to increase demand are needed to recover from a deep recession and financial crisis.
theguardian.com
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