George Osbourne has recently defended the launch of the £80bn Funding for Lending scheme, aimed at kick starting bank lending for businesses and households. He has claimed this scheme is not a powerless act in the face of the Eurozone Crisis, and that it can really help the availability of credit for a number of sectors.
The Bank of England and the Treasury unveiled the funding for lending scheme as an attempt to repair the ongoing unwillingness of the banks to lend to businesses, with an eye on helping the country move away from double dip recession. With the Eurozone crisis taking its toll on the banking sector, the price of borrowing is rising and its availability is falling, meaning many businesses aren’t getting hold of the funding that they need.
Funding for Lending is looking to address this problem, offering banks cheap finance on the condition that they pass this on to their customers. It aims not only to make business finance more affordable but also looks to make mortgages more within the reach of more aspiring homeowners. This is hoped to make the housing market healthier, as well as supporting businesses who are looking to expand.
Under the scheme, British banks are to be offered funding at low interest rates over a four year period, although this will be directly related to the bank’s lending performance. For every £1 of additional lending made by the bank, there will be an extra £1 of cheap funding available from the Funding for Lending Scheme. Those that reduce lending will need to pay higher fees to use the scheme.
While there are no guarantees that the scheme will result in increased lending for businesses – given the under-performance of schemes such as Project Merlin -it’s hoped that banks will want to take advantage of the cheap finance.