Funding for Lending Scheme Launched

Funding for LendingThe Bank of England and HM Treasury have just announced their new Funding for Lending Scheme (FLS) to pump more money in to the UK economy. Where previous rounds of Quantitive Easy (QE) have failed to show the expected improvements in lending, the aim of the new FLS is to ensure money goes directly to the "real economy".

The (initial) £80 billion scheme effectively makes more money available to banks and building societies, as with QE, but with the added incentive that eligible participants will be encouraged to build up sufficient collateral to support their future use of the scheme. In other words, if the instutions involved lend more they will be able to borrow more.

In a joint press release the two stakeholders stated that:

"…for every pound of additional real economy lending an institution advances, an additional pound of access to the scheme will be permitted for that institution."

The price of borrowing for each institution will vary depending on the volume of lending during the period of the Funding for Lending Scheme. Those that maintain a high level of lending for the duration of the FLS (18 months) will pay 0.25% per annum whereas those that lend less will be subject to higher rates up to a maximum of 1.5%

Mervyn King, the Governor of the Bank of England, said of the new scheme:

“This joint action by the Bank and the Treasury creates strong incentives for banks to expand their lending to the real economy. The more banks expand lending, the more they can use the Scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available".

The Chancellor of the Exchequer, Geroge Osborne, added:

“Today’s announcements aim to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their own home.  The Treasury and the Bank of England are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm.”

John Cridland, the CBI’s Director-General also commented on the new scheme, speicifically about lending to businesses;

“Smaller businesses I talk to are concerned with cost of borrowing as well as with its availability. Funding for Lending will help the transition to a ‘new normal’, where structural changes in banking, driven by capital and liquidity reforms, are impacting on business finance.”

The Funding for Lending Scheme will open its Discount Window Facility (DWF) for drawings on the 1st August.

For full details see the PDF at the Bank of England website: The Funding for Lending Scheme.

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