Bank of England and HM
Treasury announce launch of Funding for Lending Scheme
The Bank of
England and HM Treasury are today announcing the launch of the
Funding for Lending Scheme (FLS). The FLS is 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 introduction of the FLS occurs against the backdrop of a
euro-area debt crisis which has revealed severe vulnerabilities in
the European banking system and has led to a marked deterioration
in the outlook for the UK economy over the past twelve months. In
spite of the policy actions of the authorities, the flow of credit
through the banking system – which households and many businesses
necessarily rely on – has remained impaired. The FLS is designed
to tackle this problem by reducing the price at which banks and
building societies are able to fund themselves.
In the publication of an exchange of letters between the Governor
and the Chancellor, accompanied by a background Explanatory Note
and a Market Notice, the Bank and HM Treasury have today outlined
the design and operation of the FLS. From today, 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 4 years against DWF-eligible collateral, for
a fee.
Participating banks and building societies will be able to borrow
up to 5% 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). In other words, 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. There is no upper limit on the size of either
individual or aggregate borrowing under the scheme. By way of
illustration, 5% 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% pa 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% pa where lending decreases by 5%
or more.
The FLS is designed to encourage broad participation so that as
many institutions as possible have incentives to lend more to the
UK real economy through, for example, business loans and
residential mortgages, than they otherwise would have. Access to
the scheme will be for those banks and building societies who sign
up for the Bank’s Discount Window Facility. Institutions will be
permitted additional access to the scheme, pound-for-pound with
any increase in lending, provided they have sufficient
DWF-eligible collateral. The amount borrowed from the Bank of
England, and the amount lent to households and firms, by each
participating institution will be made public by the Bank of
England on a quarterly basis.
Although the Bank will not be indemnified for the operation of
the FLS, the exchange of letters published today shows that the
Bank has sought and received an assurance from the Government that
the objectives of the Scheme lie within its remit. In addition,
the FLS will be overseen by a joint Bank / HMT Oversight Board,
which will meet on a quarterly basis.
Commenting on the launch of the Scheme, the
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".
The Chancellor of the Exchequer said: “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.”
ENDS
Notes for Editors 1. The letter from the
Governor of the Bank of England to the Chancellor of the Exchequer
can be accessed here: http://www.bankofengland.co.uk/monetarypolicy/documents/pdf/govletter120713.pdf
2. The letter from the Chancellor of the Exchequer to the
Governor of the Bank of England can be accessed here: http://www.hm-treasury.gov.uk/d/chx_letter_130712.pdf
3. The Explanatory Note can be accessed here: www.bankofengland.co.uk/markets/Documents/explanatory_notefls120713.pdf
4. The Market Notice can be accessed here: http://www.bankofengland.co.uk/markets/Documents/marketnotice120713.pdf
Contacts:
HM Treasury Press Release
GlideBouncebacks@HMTreasury.gsi.gov.uk