The encyclopedia · Finance & Accounting · Financial decision · 2012–2015
The Bank of England made the price of cheap funding grow with lending
In 2012 the Bank of England lent banks cheap funds whose price fell the more they lent to the real economy
Bank of England · HM Treasury
the move
After the 2008 crisis banks held cheap central-bank money but stopped lending, so cheap funding failed to reach households and firms. Lowering the rate alone did nothing.
In July 2012 the Bank of England and HM Treasury launched the Funding for Lending Scheme. Participants could borrow up to 5% of existing lending, plus pound-for-pound for any net new lending, and the fee fell for lenders who expanded and rose for those who cut back.
This made the discount contingent on behaviour. A bank earned cheap funding by lending more, so the scheme targeted the freeze rather than the price of money, and the structure became a template for lending-conditioned facilities.
why it works
- The fee was tied to net lending, so expanding credit lowered a bank's funding cost
- Pound-for-pound access meant every new loan bought more cheap funding, not less
- Banks that shrank paid a higher fee, so there was a penalty for hoarding
- It reached the real economy directly rather than hoping low rates would flow through
what transfers
To make cheap funding produce loans, attach the price to the lending you want: tie the discount to expanded credit, and a bank wins only by doing what the economy needs
what came after
The scheme opened to drawings from August 2012 to January 2015 and was extended in April 2013 to include non-bank lenders and to tilt incentives toward small and medium enterprises. It was credited with pushing down mortgage and corporate rates, though business lending stayed weaker than hoped. The lending-contingent design became a reference for how a central bank can try to turn cheap funding into actual credit.
references
- Bank of England and HM Treasury announce launch of Funding for Lending Scheme
- Funding for Lending scheme to encourage lending to families and businesses
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