The Bank of England and HM Treasury have launched a scheme aimed at boosting lending to the real economy by banks. Image courtesy of sxc.hu/David Playford. the real economy by banks.
The Bank of England and
HM Treasury have today (July 13) revealed details of the
Funding for Lending Scheme (FLS) aimed at boosting
lending to the real economy by banks.
The Bank of England will make cheaper funds available to banks and building societies that increase lending to UK consumers and businesses. Participating financial institutions will be able to borrow up to five percent of their stock of existing lending to the real economy, plus any net expansion of lending during a reference period (June 30, 2012 to December 31, 2013).
To put this into perspective, five percent of the stock of existing loans is equivalent to roughly £80bn across all potentially eligible banks and building societies.
The FLS will open for drawings on August 1 and for 18 months thereafter. There is no upper limit on the size of either individual or aggregate borrowing under the scheme.
The price of each institution’s borrowing in the FLS will depend on its volume of lending to the real economy during the reference period.
This is the first initiative which makes the loaning of money to banks conditional on the grounds that the money is passed on through mortgages or business loans.
The introduction of the FLS comes against the backdrop of the
Eurozone crisis which has led to a marked deterioration in the outlook for the UK economy over the past 12 months. During this time, the flow of credit through the banking systems – which many businesses and households rely on – has remained blighted.
Sir Mervyn King, the governor of the Bank of England, first announced the scheme last month (June 14) in his
Mansion House speech.
Commenting on the launch of the scheme, King said: “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."
Chancellor George Osborne commented: “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.”