UK’s Chancellor, George Osborne, has announced that Funding For Lending (FFL), which is a joint initiate of the Bank of England and Treasury, is likely to replace the National Load Guarantee Scheme (NLGS). Under FFL money will be made available to the banks at low interest rates, which is expected to be as low as 0.25%, provided then pass it on to businesses and households.
FFL will provide banks with money for up to 4 years and it is expected to attract more banks than the NLGS because it will help banks avoid volatility in wholesale debt markets.
It is believed that FFL will encourage banks to be more willing to provide loans as the cost of FFL will be directly linked to the banks’ lending performance. Under FFL, every £1 of lent by the bank will qualify it for an extra £1 of cheap funding. On the other hand, cost of scheme will rise for those banks who will reduce their lending levels.
It is hoped that competition among banks to access cheaper funding will reduce the cost of borrowing for consumers and businesses as well as increasing the supply of credit.
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