The Funding for Lending Scheme (FLS) draw down window is now open for the next eighteen months. Starting today, banks and building societies can borrow in the FLS at cheaper rates, for periods of up to four years.
The Scheme delivers credit easing to the whole economy, and has strong incentives for banks and building societies to increase lending to UK households and businesses: those that lend more, can borrow more in the FLS, and can do so at lower cost than those that scale back lending.
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 than they otherwise would have.
It is expected that banks currently offering loans through the National Loan Guarantee Scheme (NLGS) will, over time, cease to offer NLGS branded products.
The NLGS has been successful in providing reduced rate loans for smaller businesses. However, changes in market conditions since the introduction of the NLGS means it is now less economical for banks to raise unsecured funding.
In practice, this means that banks who are currently offering NLGS loans will likely opt to deliver credit easing to the whole economy through the FLS going forward. The NLGS will remain available to banks if they wish to use it in the future, or if market conditions change.
The Chancellor said:
The NLGS has made a real difference, with over 16,000 cheaper loans worth over £2.5bn already offered to businesses across the UK. 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.
Notes for Editors
The Bank of England and HM Treasury announced the launch of the Funding for Lending Scheme (FLS) on 13 July 2012.
The FLS has opened for drawings today: for the next 18 months, banks and building societies can borrow UK Treasury Bills from the Bank of England for a period of up to 4 years against Discount Window Facility-eligible collateral.
Participating banks and building societies are able to borrow up to 5 per cent 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. 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.
Institutions will pay a fee for borrowing through the FLS. The price of each institution’s borrowing 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 per cent pa on the amount borrowed; for banks or building societies whose lending declines, the fee will increase linearly, up to a maximum of 1.5 per cent pa where lending decreases by 5 per cent or more.
The National Loan Guarantee Scheme (NLGS) was launched on 19 March 2012 to provide government guarantees on unsecured borrowing by banks, enabling them to borrow at a cheaper rate.
Participating banks are required to pass on the entire benefit that they receive from the guarantees to smaller businesses across the UK through cheaper loans. Businesses that take out an NLGS loan receive a discount of 1 percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme.
The NLGS was originally available to UK businesses with a company group annual turnover of less than £50 million. On the 26 June 2012 this limit was increasing to an annual turnover of £250 million.