Bank of England announces cheaper funding for banks lending to the 'real economy'

In a plan that was put together with the Treasury, the BoE will lend UK Treasury Bills for four years to banks at a price that varies according to how much lending that bank is doing to people and businesses.

The mechanism is called the Funding for Lending Scheme (FLS) and will allow banks to borrow 5% of the amount they are lending to the real economy, the BoE said.

"Participating banks and building societies will be able to borrow up to 5% of their stock of existing lending to the real economy, plus any net expansion of lending during a reference period (from end-June 2012 to end-December 2013)," said a BoE statement. " In other words, for every pound of additional real economy lending an institution advances, an additional pound of access to the scheme will be permitted for that institution."

"The price of each institution's borrowing in the FLS will depend on its volume of lending to the real economy during the reference period," it said. The BoE said that the total cost of the borrowing will be lower than existing borrowing costs.

"As banks increase lending [to the real economy], their overall funding costs will fall," it said. "For banks or building societies whose lending declines, the fee will increase linearly, up to a maximum of 1.5% pa where lending decreases by 5% or more."

"This joint action by the Bank and the Treasury creates strong incentives for banks to expand their lending to the real economy," said BoE Governor Mervyn King. "The more banks expand lending, the more they can use the Scheme. That will encourage banks to make loans to families and businesses both cheaper and more easily available."