Funding for Lending scheme aims to cut loan costs
A multi-billion pound scheme designed to make more - and cheaper
- loans and mortgages available to businesses and individuals has
The scheme, called Funding for Lending, will see the Bank of
England make low-cost funds available to banks and building
The aim is to tackle rising borrowing costs and a drop in
lending. Lending has fallen 16% since its peak in 2008.
However, some expressed concerns that not all savings would be
"The banks may not pass on all that cost advantage they may just
take it on wider margins," Graeme Leach, from the Institute of
Directors, told the BBC.
"And at the end of the day you know the elephant in the room is
the euro crisis and companies and consumers need the confidence to
Banks will initially be able to borrow the equivalent of 5% of the
amount they currently lend. But if they increase their lending,
they will be able to borrow more.
There is no upper limit on the amount financial institutions can
borrow at cheaper rates, but the first allocation is expected to be
worth £80bn, or 5%, of the current stock of lending.
"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 Treasury and the Bank
of England said.
One of its aims is to bring down mortgage interest rates, which
have risen by about 0.5 percentage points in the past year.
One mortgage broker said it was vital that cheaper funding was
targeted at the homebuyers who needed it most.
"It is vital that any lending is available in the loan-to-value
bands that need it," said Mark Harris, chief executive of SPF
"If funding will only be cheaper and easier for those with, say,
a 50% deposit or similar level of equity, for example, there will
be little improvement on the current situation," he said.
Carrot and stick
The Funding for Lending scheme will begin in August and will be
open for 18 months.
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.
There are penalties built in to the scheme, as well as
incentives. If, even despite the cheaper funding, the financial
institutions still cut the total amount they lend, the Bank of
England will charge them more, up to a maximum of 1.5%.
Chancellor George Osborne said he hoped it would support
households and businesses "at a challenging time" .
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".
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 in a letter to Bank of England
governor Sir Mervyn King.
Labour shadow Treasury minister Chris Leslie said the plan did
not go far enough.
"To address the biggest problems in our economy... we need a
change of course from the government on tax rises and spending cuts
which go too far and too fast.
"Only a credible and balanced plan for jobs and growth that gets
our economy moving again and people back to work will succeed in
getting the deficit down," Mr Leslie said.
The Bank of England (BoE) will publish the amount lent to firms
and households every three months.
The British Chambers of Commerce (BCC) gave the scheme a
cautious welcome, saying it was keen to see how the scheme worked
in practice, and urged the government to go further.
"We will be watching closely to see if this has any positive
impact for new and growing businesses, which have largely been
frozen out of the market for finance in recent years," said BCC
policy director Adam Marshall.
"As [the BoE and the Treasury] roll out Funding for Lending,
they should be even more radical and plan for the creation of a
bona fide business bank in the medium to long-term."