BoE announces scheme to boost bank lending

The Bank of England has announced plans to make it cheaper for banks to borrow, as long as they lend more to consumers and businesses.

by Michael Northcott
Last Updated: 19 Aug 2013

In an attempt to combat the lending impasse that has plagued the banking sector for several years now, the Bank of England and the Treasury today announced a new Funding for Lending Scheme (FLS), which will allow banks to borrow more at lower rates, as long as they lend more to consumers and businesses. 

However much banks already lend, the Bank of England will make a further 5% available at lower rates. On banks’ current lending totals, this would amount to £80bn worth of extra lending – a massive shot in the arm for the economy. The good thing is that this cheap money will not be available to banks unless they actually lend it, meaning we could see a genuine injection of cash into the real economy. 

The scheme is introduced as woes in the eurozone continue on fine form: Spain’s 10-year bond yields haven’t stopped hovering around (and often breaching) the 7% mark, at which investors start running scared. Add to that, Italy’s debt was today downgraded by credit ratings agency, Moody’s. The constant need for bailouts, left, right and centre has made banks jittery about who to lend to and how much exposure to build up. If a country crashes out of the euro, the worry, it will take a string of banks down the toilet with it. 

Against this background however, other players are seeing a business opportunity. The Co-operative Group is about reach a final agreement with Lloyds Banking Group to buy 630 of the latter’s high street branches. Not only does this mean the supermarket and newsagent is getting into the banking business in a big way, but it is also getting the branches at a knock-down price. The deal originally mooted was for £1.5bn, but it is thought that the deal will come in considerably cheaper for the Co-op, partly because Lloyds stands to take some of the profits over a few years if the Co-op’s bank performs well. 

We reckon these developments are testament to the idea that innovation is what’s needed to dig the economy out of stagnation. Let’s hope it gets some more money circulating in the economy, rather than yet more ending up in the corporate cash pile… 

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