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By Donia O'Loughlin | Published Jul 13, 2012

BoE and Treasury launch Funding for Lending Scheme

The Bank of England and HM Treasury have launched a Funding for Lending Scheme (FLS), designed to boost lending to the real economy.

Banks and building societies that increase lending to UK households and businesses will be able to borrow more in the FLS, and do so at lower cost than those that scale back lending.

The FLS is designed to tackle the “impaired” flow of credit through the banking system by reducing the price at which banks and building societies are able to fund themselves.

From today (13 July), eligible banks and building societies are encouraged to ensure they build up sufficient eligible collateral pre-positioned with the Bank to support their future use of the scheme. The FLS will open for drawings on 1 August.

For 18 months thereafter, banks and building societies will be able to borrow UK Treasury Bills from the Bank for a period of up to four years against discount-window facility eligible collateral, for a fee.

Participating banks and building societies will be able to borrow up to 5 per cent of their stock of existing lending to the real economy, plus any net expansion of lending during a reference period (from end-June 2012 to end-December 2013).

There is no upper limit on the size of either individual or aggregate borrowing under the scheme. For example, 5 per cent of the stock of existing loans is equivalent to roughly £80bn across all potentially eligible banks and building societies.

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. For banks or building societies maintaining or expanding their lending over that period, the fee will be 0.25 per cent per annum on the amount borrowed.

After accounting for the cost of using the T-bills to borrow money, the total cost of funding for an institution using the FLS will be lower than current term funding rates, even for the strongest institutions. So as banks increase lending, their overall funding costs will fall. For banks or building societies whose lending declines, the fee will increase linearly, up to a maximum of 1.5 per cent per annum where lending decreases by 5 per cent or more.

Mervyn King, governor of the Bank of England, 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”.

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