New lending scheme set for launch

The Bank of England and Treasury’s “funding for lending” programme will see an estimated £80bn offered to banks on condition they pass it on to businesses and households in the form of cheaper loans and mortgages.

The co-ordinated action is part of a raft of measures being taken to boost lending as banks face a worrying new phase in the credit crisis.

Worsening conditions in the eurozone are making it harder and more expensive for banks to borrow, while they have also been hoarding cash to shore-up their balance sheets in the face of economic woes.

The Bank and Treasury hope the funding for lending initiative will provide the incentive needed to free-up funding for banks and support the economy.

Under the proposals, British banks will be offered vital funding at low interest rates over a four year period.

But the funding will be linked to bank lending performance in what marks a direct attempt to free up the log-jam in credit hitting the economy.

Bank Governor Sir Mervyn King - who first revealed the plans in his Mansion House speech last month - warned in a BBC interview this week that a “great black cloud of uncertainty” hung over businesses as the eurozone crisis deepened.

He said lending to businesses has been falling since the crisis started, but that the funding for lending programme should help provide access to finance.

The Bank has already said bank funding will be offered at rates that will be so attractive it will “hit banks in the face”, with further details expected in today’s launch.

But experts have been quick to warn there are no guarantees the plans will address the core problem of companies’ reluctance to borrow in the face of a eurozone debt storm.

And economists cautioned that banks may simply not want to lend more, even with the carrot of cheaper funding.

The funding for lending launch comes a week after the Bank announced another £50bn will be pumped into the economy through its quantitative easing (QE) programme, taking the total offered under QE so far to £375bn.

Banks are also being told they are free to tap into billions of pounds held on their balance sheets to use for lending, after the Bank of England recommended rules on liquidity reserves should be relaxed.

This followed the launch of the Bank’s six-month loan facility programme, with the first £5bn monthly auction held at the end of June.

But there is little prospect of a reduction in the main Bank base rate below 0.5 per cent after Sir Mervyn and fellow policymakers told MPs recently it would fail to lead to widespread cuts in borrowing costs and could instead damage small lenders.

While a rate cut was not ruled out, Sir Mervyn stressed if interest rates were reduced further, it would risk hurting building societies by squeezing their already tight interest margins.