In early July 2012, details of the scheme were still to be finalised, but it will provide banks with cheaper funding than they can arrange in the capital markets tied to their additional net lending.

 

The funding will be offered by the Bank of England, secured against a wide range of banking assets including loans to companies and households and it is likely the discount on market funding rates will increase the more lending a bank achieves. [1]

There two programmes and they are aimed at different things.  Funding for Lending is intended to help make more cash available for lending to businesses and households. for up to four years.

The Bank of England programme will probably lend more – as much as £160bn – but for a shorter period of six months. It is there because banks rely on other banks and money market funds for their daily cash needs and those banks, in turn, are increasingly reluctant to lend.

The other scheme is a six-month lending programme.  That is aimed at banks’ immediate need to raise money. Banks are becoming increasingly nervous about lending to each other, particularly in Europe. They will only lend against high quality collateral and even then they are charging higher rates. Banks have borrowed so much using top quality collateral that they have not got much left to use to raise more money. That is where the BoE comes in. It has agreed to lend against portfolios of loans that most other lenders will not touch. And they will not charge more for it, either. [2]

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