Details of 'funding for lending' scheme unveiled

The Bank of England and the Treasury yesterday set out details of an £80bn scheme designed to encourage banks to increase their lending to the UK economy.

Under "funding for lending", institutions will be invited to borrow money from the Bank of England for a fee that will remain low if they increase their supply of lending to British homes and households.

The fee will rise if they shrink their lending books.

The policy, first announced last month by the Bank's Governor, Sir Mervyn King, is meant to stop the supply of credit to the real economy being choked off as banks see their own borrowing costs rise because of the eurozone debt crisis.

George Osborne said: "This is a huge help, many billions of pounds of help for the British economy, because we've got lots of problems in the world, problems in the eurozone, a slowing economy in China …but the British Government can act and will act."

Banks will initially be able to borrow up to 5 per cent of the value of their lending books to the real economy. If all eligible financial institutions took part and drew down the maximum amount, £80bn in new lending would be made available.

The fee for banks that take part will be 0.25 per cent per annum on the amount borrowed over a four-year period, cheaper than any bank could borrow in the private debt market. However, if they fail to increase the size of their loan books, the fee will rise, hitting a maximum of 1.5 per cent if lending declines by 5 per cent or more.

The Bank of England will publish the amount borrowed by individual banks and the amount of new lending they have made available. Banks can borrow from 1 August and the first report on loans made will be released in September.

The Government's Project Merlin scheme, designed to increase lending to small and medium sized firms, ended earlier this year. It was criticised for giving the banks gross, rather than net lending targets. Net lending to small business shrank during the programme.

In March the Government unveiled a £20bn credit easing scheme, guaranteeing banks' borrowing, if they passed on the loans to small business.