Banks speed up repayment of £185bn funding lifeline

In its quarterly bulletin, the Bank said it had been holding discussions with the sector to speed up repayment of the Special Liquidity Scheme (SLS) - a move that has already seen around 75 billion repaid by the end of November.

But there are fears early repayment of the SLS early could now hold the sector back from lending to businesses and households, which is crucial to maintaining wider economic recovery.

The SLS has been a vital source of funding for banks after wholesale markets froze during the credit crunch.

It was introduced to provide emergency cash to the banking system in early 2008, allowing groups to swap high quality mortgage assets for more easily tradable Treasury bills.

However, it was only ever designed to be a temporary facility and is being withdrawn in 2012.

The Bank has already sought to make it clear to the industry that the SLS will not be extended and that banks will have to stand on their own two feet.

It said in its quarterly bulletin today it had held "bilateral discussions with users of the scheme to ensure that there were credible funding plans in place to reduce their use of the scheme in a smooth fashion".

The central bank has been concerned that a scramble to refinance loans before the SLS deadline could lead to a new funding crisis next year.

The Bank offered hope the sector will be able to manage the lending pressures as it confirmed signs of an improvement in bank funding markets, although it said this had been impacted by eurozone debt worries.

Lloyds Banking Group recently said wholesale markets had begun to reopen, beating its funding target for the whole year in September.