UK Economy: £80bn Scheme To Kick-Start Bank Lending Launched

£80bn Scheme To Kick-Start Bank Lending Launched

An £80 billion initiative to kick-start bank lending was fired into action today in the latest attempt to boost the struggling economy.

The Bank of England and Treasury's Funding for Lending scheme (FLS) will make money available to banks on the condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

At a time when banks face a worrying new phase in the credit crisis, Chancellor George Osborne said the scheme would help ease credit conditions throughout the economy.

But he confirmed that the scheme would ultimately supersede the £20 billion National Loan Guarantee Scheme, known as credit easing, which was unveiled in March as a flagship policy to boost lending to businesses.

The Chancellor said the credit easing scheme had "made a real difference" by offering more than 16,000 cheaper loans worth more than £2.5 billion to businesses across the UK and would be kept going in case it was required again.

He said: "In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work.

"The more generous FLS has officially opened for business and will in time effectively take over from the NLGS, delivering credit easing to the whole economy."

Labour claimed that would be a further blow to Chancellor George Osborne after he announced in June that the scheme was to be extended to allow larger businesses to take part.

Shadow Treasury minister Chris Leslie said: "If the National Loan Guarantee Scheme was always supposed to be replaced by the new Funding for Lending scheme, then why, two weeks after that new scheme was announced, did George Osborne say that the NLGS would be extended?"

The latest initiative comes as the UK is mired in the longest double-dip recession in more than 50 years, with the Chancellor facing criticism that his austerity measures are damaging the economy.

Worsening conditions in the eurozone are making it harder and more expensive for banks to borrow, while they have also been hoarding cash to shore up their balance sheets in the face of economic woes.

The Bank and Treasury hope the funding for lending initiative will provide the incentive needed to free up funding for banks and support the economy by easing the flow of credit to households and businesses.

It is hoped that first-time buyers and small businesses will benefit the most, as they have been starved of affordable credit.

Under the proposals, British banks will be offered vital funding at low interest rates over a four-year period.

But the funding will be linked to bank lending performance in a direct attempt to free up the log-jam in credit hitting the economy.

The fees on the loans are set up in such a way as to incentivise banks to increase lending to households and businesses.

For every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the scheme. Those that reduce lending will have to pay higher fees to use the scheme.

Banks will be able to access finance at rates from around 0.75% including fees - far cheaper than the equivalent 1.25% to 2.5% rate in finance markets.

But experts have been quick to warn there are no guarantees the plans will address the core problem of companies' reluctance to borrow in the face of a eurozone debt storm.

And economists cautioned that banks may simply not want to lend more, even with the carrot of cheaper funding.

Mr Leslie added: "Despite promises from ministers, net lending to businesses has fallen in every month of this Government.

"And there are serious questions about whether the new Funding for Lending scheme will really see lending to businesses become cheaper and easier to access."

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