Euro Bank's cheap loans scheme praised by King
Bank of England governor Sir Mervyn King said a scheme that has injected an additional €529.5bn (£448.7bn) into the European economy has helped avoid a run on the region's banks.
The European Central Bank dished out cheap three-year loans to 800 banks yesterday, which in addition to a £414.4bn injection in December means it has now flushed the banks with nearly £900m.
The long term refinancing operation has been praised for helping to avert another financial crisis in Europe and Sir Mervyn told MPs it had helped banks to avoid a run.
But he dismissed questions at a Treasury Select Committee meeting that the scheme could be used in the UK to encourage banks to lend more to small and medium enterprises (SMEs).
He said: "It has provided to banks, particularly in the southern area, which were experiencing a banking run.
"That money was flowing to banks in the northern area and the prospect of a run has been removed because of it.
"But the UK banking system is not short of liquidity - if anything it needs more capital. The idea the LTRO has eased SME funding is a myth."
It is understood that European banks have mainly used the money to buy Government bonds, which has reduced the borrowing costs of many debt-ridden eurozone nations from unsustainable peaks.
The scheme has also helped to buy banks some time to repair their balance sheets and ECB president Mario Draghi hailed the first round of funding as having averted a "major, major credit crunch".
Meanwhile, Labour MP George Mudie asked representatives of the Bank of England why they have not done more to boost funding to SMEs, with many struggling to stay afloat as banks cut lending.
But Sir Mervyn said the Bank does not have the power to lend to small businesses and said only the Government can put taxpayers' money at risk. He said the Government could either force Royal Bank of Scotland, in which it owns a majority stake, to lend more or it could introduce subsidies to encourage loans.
The governor's words will heap further pressure on Chancellor George Osborne to help SMEs ahead of his Budget speech on March 21 in which he is expected to announce a "credit easing" programme to underwrite cheap loans to businesses.