In an effort to tackle the eurozone crisis, Bank of England (BoE) has released details of the Funding for Lending scheme, which aims to provide low-cost loans and mortgages to banks, building societies and individuals.
The institutions can initially borrow 5% of the amount that they lend and as their lending increases, they would become eligible to borrow more. There is no upper limit on the amount financial institutions can borrow, but the first allocation is expected to be worth £80 billion, which is 5% of the current stock of lending.
The initiative is a step towards tackling issues such as low lending levels and high borrowing costs resulting from the persistent eurozone crisis. The funding 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. This interest rate is much lower than what it currently costs them to borrow on the wholesale markets. There are incentives as well as penalties built in to the scheme.
If financial institutions cut the amount they lend, BoE will charge them interest up to a maximum of 1.5%. The BoE will publish the amount lent to firms and households every three months. The Treasury and the Bank of England said, “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.”
In a letter to BoE’s governor Sir Mervyn King, Chancellor George Osborne said, that 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.”