From today, eligible banks and building societies are encouraged to ensure they build up sufficient eligible collateral pre-positioned with the Bank of England (BoE) to support their future use of the scheme.
The FLS will open for drawings on 1 August. For 18 months thereafter, banks and building societies will be able to borrow UK Treasury Bills from the Bank for a period of up to four years against a DWF-eligible collateral (Discount Window Facility), for a fee. Participating banks will qualify to borrow up to 5% of their stock of existing lending, equating to approximately £80bn across all eligible institutions.
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.
For banks or building societies maintaining or expanding their lending over that period, the fee will be 0.25% pa on the amount borrowed.
After accounting for the cost of using the Treasury bills to borrow money, the total cost of funding for an institution using the FLS will be lower than current term funding rates, even for the strongest institutions, the Bank confirmed.
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.
Bank Governor Mervyn King, said: “This joint action by the Bank and the Treasury creates strong incentives for banks to expand their lending to the real economy. 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”.
Osborne added: “Today’s announcements aim to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their own home.
“The Treasury and the BoE are taking coordinated action to inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the eurozone debt storm.”
