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Bank lending scheme details due Funding for Lending scheme launched
(40 minutes later)
Details of a scheme aimed at boosting lending by banks are to be unveiled by the Bank of England and the Treasury. A multi-billion pound scheme designed to make more - and cheaper - loans and mortgages available to businesses and individuals has been outlined.
The aim is to make billions of pounds of cheaper funds available to banks, but only if they use the money to boost loans to businesses and consumers. The scheme, called Funding for Lending, will see the Bank of England make low-cost funds available to banks and building societies.
The move is part of a raft of measures taken to try to increase lending. They will initially be able to borrow the equivalent of 5% of the amount they currently lend.
But this is the first initiative which makes loans to banks conditional on the money being passed on through mortgages or business loans. But if they increase their lending, they will be able to borrow more.
The central bank could make up to £80bn available, the equivalent of 5% of the current lending by High Street banks. There is no upper limit on the amount financial institutions can borrow, but the first allocation is expected to be worth £80bn, which is 5% of the current stock of lending.
Sir Mervyn King, the governor of the Bank of England (BoE), announced the Funding for Lending scheme last month in his Mansion House speech. The eurozone debt crisis has damaged confidence, leading to falls in lending levels and higher borrowing costs, and this initiative aims to tackle those problems.
Crucial to its success will be whether it really does persuade banks to make affordable credit widely available. The href="http://www.hm-treasury.gov.uk/ukecon_fundingforlending_index.htm" >Funding for Lending scheme will begin in August and will be open for 18 months, according to details released by the Treasury and the Bank of England.
Analysts suggest banks have been reluctant to lend not only because they need to strengthen their balance sheets, but also because of economic uncertainty. These factors have also pushed up the cost of borrowing. Banks and building societies will be able to borrow, for a fee of 0.25%, over four years. That interest rate is much lower than it currently costs them to borrow on the wholesale markets.
But CBI director general John Cridland said he thought the new scheme could make a difference. There are penalties built in to the scheme, too. If financial instititutions cut the amount they lend, the Bank of England will charge them interest up to a maximum of 1.5%.
"There is a real incentive for the banks because the banks can get cheaper money, but only if they lend it on," he said. Chancellor George Osborne said he hoped it would support households and businesses "at a challenging time" .
The British Chambers of Commerce said it thought the scheme would bring down interest rates on loans and mortgages, but added that strict conditions, ensuring the banks lend the new funds out, were crucial. He said uncertainty caused by the eurozone crisis was "contributing to increased funding costs for UK banks and tighter credit conditions for households and businesses".
"I am not convinced they can prove that is the case," said Adam Marshall, the BCC's director of policy. The scheme "will support the flow of credit to where it is needed, complementing the MPC's asset purchase programme in easing monetary policy conditions", he said href="http://www.hm-treasury.gov.uk/d/chx_letter_130712.pdf" >in a letter to Bank of England governor Sir Mervyn King.
Central bank efforts
The new scheme comes at a time when worsening conditions in the eurozone are making it harder and more expensive for banks to borrow.
Sir Mervyn told the BBC this week that the eurozone debt crisis had created "a great black cloud of uncertainty" hanging over global business.
Last week, the central bank announced it would pump a further £50bn into the economy over the next four months through its quantitative easing (QE) programme, taking the total stimulus to £375bn.
QE aims to boost the economy by buying assets such as government bonds, in an attempt to increase lending by commercial banks.
The BoE has also recommended relaxing rules on liquidity reserves, so that banks can tap into the billions of pounds held on their balance sheets to use for lending.
And at the end of June it held its first £5bn monthly auction under a six-month loan facility programme, which provides banks with access to cash at cheap rates, should they encounter any short-term funding difficulties.
Analysts have suggested there could be further stimulus measures on the way as the BoE tries to kick-start the UK economy, which shrank by 0.3% in first three months of this year and by 0.4% in the final quarter of 2011.
Do you run a small business? Have you tried to get a loan? What do you think of this scheme? Send us your comments using the form below.Do you run a small business? Have you tried to get a loan? What do you think of this scheme? Send us your comments using the form below.