The encyclopedia · Finance & Accounting · Operational decision · 2012–2014
Britain priced bailout funding by lending growth, so banks that lent more paid less
The Bank of England lent banks cheap four-year money, but set the fee by how much each bank lent to the real economy.
Bank of England · HM Treasury
the move
In mid-2012 the euro-area debt crisis had pushed UK banks' funding costs up and lending down. The standard tool was to hand banks cheap money and hope it reached borrowers. The Bank of England and Treasury did the opposite: the Funding for Lending Scheme let each institution borrow Treasury bills on a sliding scale of cost.
A bank could borrow up to 5% of its existing real-economy loan book, and one extra pound per additional pound it lent. The fee was 0.25% a year for banks that held or expanded lending, climbing to 1.5% for those that shrank by more than 5%. So the price of the lifeline fell as a bank did more of the thing the scheme was for.
The design attacked the root cause: banks were not short of collateral, they were short of cheap funding and had no reason to take on more lending risk. By making cheap funding conditional on new lending rather than on existing balance sheets, the Bank made the incentive private positive.
why it works
- The fee was set by lending behaviour, so the incentive applied to every participating bank, not just the weakest
- Cheap T-bill funding lowered the whole funding curve, pushing mortgage and business rates down
- The scheme published each bank's drawdown and lending quarterly, so the incentive was verifiable and public
- It stacked on the Bank's discount-window collateral, reusing existing plumbing rather than building new
what transfers
A rescue that is priced by the borrower's future behaviour turns a subsidy into a self-reinforcing incentive instead of a one-way gift.
what came after
The scheme was extended and re-focused on SMEs in 2013, and eventually closed by 2014. Evidence was mixed: bank funding costs fell and lending stabilized, but much of the new funding went into mortgages, not small business investment, and fees were later waived for SME lending.
references
- Bank of England and HM Treasury announce launch of Funding for Lending Scheme
- Developments in financial markets, monetary and macroprudential policy - speech by Paul Fisher
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