What Is The Funding for Lending Scheme?

The Bank of England and HM treasury launched the Funding for Lending Scheme (FLS) in July 2012 as a large-scale incentive for banks and building societies to boost their lending to individuals and businesses.

In simple terms, the FLS allows participating financial institutions to borrow from the Bank of England cheaply, so they can then pass on the cheap loans to borrowers. The idea of the scheme was to unblock the lending channels in the UK economy – loans from banks and building societies to non-financial companies had dropped by 17% from 2008 to 2012 as a result of the so-called credit crunch.

Technically, FLS works like this: lenders are encouraged to approach the Bank of England to borrow UK Treasury Bills for a four-year period in exchange for eligible assets – such as loans they already have. The lenders are then able to use the Treasury Bills as backing to borrow at cheap rates in the wholesale financial markets.

Unfortunately, the scheme wasn’t exactly an instant success. In December 2012, the Bank of England reported that in the third quarter of the year, only six banks or building societies had taken advantage of the scheme, borrowing a total of £4.4 billion and boosting their net lending by just £496 million. Net lending actually fell in the following quarter and also in the first quarter of 2013.

In April 2013, the Bank of England and HM Treasury announced an extension to FLS by one year, allowing participants to borrow from the scheme until January 2015, with lending skewed towards small and medium-sized enterprises (SMEs). By the end of June, 41 banks and building societies had participated in the scheme, drawing down £17.6 billion, with net lending up by £1.6 billion in the second quarter. Participants included Barclays, Co-Operative, Lloyds Banking Group, Nationwide Building Society, RBS Group, Santander, Sainsbury’s Bank, Tesco Bank and Virgin Money.

As examples of how the benefits of the scheme were passed on to customers, Lloyds cut 1% off its interest rate for SME business loans, commercial mortgages and hire purchase agreements, and Barclays offered immediate 2% cashback deals on SME business loans of £10,000 or more and commercial mortgages over £25,000.

In November 2013, the Bank of England and HM Treasury announced changes to the terms of the FLS extension, removing the direct incentives to expand household lending and focusing the scheme on business lending for 2014. Under the new terms of FLS, lending to smaller businesses was further encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to SMEs. Fees for drawing from the FLS extension were also set at 0.25%, the lowest of the previous fee scale.

Mark Carney, the Governor of the Bank of England, commented on these changes: “The Funding for Lending Scheme proved to be a successful tool in supporting the recovery. Now that the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses. Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focusing on the Funding for Lending Scheme to support them.”