But the supply of bank lending to businesses during the recovery is likely to be more expensive than it was pre-crisis and possibly constrained in quantity. In 2009 we saw one of the consequences, with a record year for sterling corporate bond and equity issuance as investment grade corporates by-passed the banking sector. The loans market is a particularly important part of the system of credit provision. Syndicated loans allow firms to borrow in larger size and for longer periods, and facilitate the lenders in diversifying their risk. Given the highly concentrated origination of business lending in this country, it is useful that the syndicated loans market and the secondary loans market allow a wider group of firms to contribute to lending to UK businesses, including non-bank participation. Over the next few years there are a lot of corporate loans, made during the boom years of credit supply, which fall due for repayment or rollover. That is a particular challenge for subinvestment grade borrowers, including most SMEs. It is clear that the high-yield debt markets are very much more developed in the United States than in Europe and so a greater burden here falls on bank finance. But non-banks may also have a key role to play. The Bank has been engaging with market participants over policies or market developments in the loans market which would support lending by non-bank institutions. Some of that analysis was reflected in a discussion paper on non-bank lending, published by HM Treasury earlier this year.
A similar point can be made about debt issued under the Government’s Credit Guarantee Scheme – the Government provides a guarantee but it is still the market which buys the bonds and provides the cash. As these schemes come to an end, the challenge for the banks is not so much the sourcing of an additional quantity of funding. It is to roll over that existing market funding into different funding instruments. More generally, a central bank should not allow its liquidity operations to become, or even to be perceived as a source of sustained funding for banks or for any other form of mediumterm lending. The only medium-term source of commercial bank funding, and hence for their lending, is private sector savings, whether channelled through retail or wholesale markets. A central bank does not have access to those private sector savings. The grey area is that short-term liquidity support, in size and continually rolled over, looks and acts a lot like funding. That is why the Special Liquidity Scheme was designed to lend against legacy assets only and one of the reasons why the Bank has been so determined that it will end as scheduled. Suppose the scheme were to be rolled on indefinitely. What was intended and designed as system-wide central bank liquidity support would become instead a fiscal operation. We would be using government debt – and hence public money – to subsidise a group of private sector firms, with the public purse being at risk.