Extended Liquidity Scheme: good news for borrowers

6 October 2008

If you have been looking to obtain credit (such as a debt consolidation loan or overdraft facility) in recent months, you may have noticed that the credit crunch has made it much more difficult. It’s not just because lenders have tightened their lending criteria – in many cases, it’s because the lenders simply can’t provide the funds themselves.

The Special Liquidity Scheme was originally put in place to ease the liquidity crisis in the UK, in which banks and other financial institutions were unwilling or unable to do business with each other on the wholesale financial markets – which in turn severely limited funds for loans and other forms of credit.

It was hoped that by pumping extra funding into the banking system, the scheme would encourage confidence amongst lenders, who in turn would continue to offer mortgages and loans – effectively keeping the industry afloat.

Why has the Special Liquidity Scheme been extended?
The extension of the scheme comes in the aftermath of two major events for the economy: the collapse of Lehman Brothers, and the merger of Lloyds TSB and HBOS. Both added a degree of uncertainty to the economy, meaning that there was a risk that availability of credit (e.g. debt consolidation loans, unsecured loans and mortgages) could suffer further as a result.

In particular, the extension of the Special Liquidity Scheme helped to push through the merger deal between Lloyds TSB and HBOS – a merger that, without the liquidity scheme, would have ordinarily been considered a risk in the current environment.

By extending the Special Liquidity Scheme, the Bank of England say they have granted “additional time for banks to plan their access to the Scheme in an orderly fashion”. Some economists argue that they have bought themselves some more time in which they hope some of the external factors affecting the economy, such as oil and imported food prices, will settle down.

What does this mean for me?
Thus far, the Special Liquidity Scheme has not had any measurable impact on the market for loans and mortgages. Lenders have continued to tighten their lending criteria, and while interest rates have remained relatively low, the volume of loans and mortgages issued has greatly reduced from before the credit crunch.

However, some economists argue that the scheme has kept many lenders in business, and without it, lenders may have been forced to put more extreme restrictions on their lending activity – which could have been financially devastating to the companies.

It’s difficult to tell how much lending criteria will be relaxed over the next few months, because the underlying economic uncertainty remains – but the extended Special Liquidity Scheme should boost confidence amongst lenders.

----------

Debt Advisers Direct specialise in a range of debt solutions, including debt consolidation, debt management plans and IVAs (Individual Voluntary Arrangements). If you are worried about your debt, contact one of our expert debt advisers.

Back to debt consolidation blog home