–UK Osborne: Funding for Lending Scheme Complements QE
–BOE FLS: banks can borrow 5% of loan stock – equates to stg80bn

LONDON (MNI) – The Bank of England and Treasury unveiled their
joint Funding for Lending Scheme Friday, designed as a complement to
quantitative easing as well as other measures to boost lending to the
real economy.

The FLS will open its door at the start of August with banks able
for an 18-month period to borrow UK Treasury bills for a period up to 4
years from the BOE, against collateral, for a fee of just 25 basis
points if the banks maintain or expand lending. The fee rises if bank
lending shrinks, with the scheme designed to provide banks with an
incentive to boost lending to the real economy.

The potential size of the scheme is large. Banks can borrow up to
5% of their current loan stocks, which currently stands at some stg80
billion, or just shy of 6% of GDP. There is no upper limit to the
scheme, as every additional pound of net lending to the real economy by
a bank adds a pound to the amount it can access from the scheme.

Banks can use collateral which has been pre-positioned with the BOE
to draw from the FLS. While the BOE does not give a running commentary
on how much collateral has been pre-positioned, back in March BOE
Executive Director Markets Paul Fisher said there was some Stg265
billion in eligible pre-positioned collateral, which with haircuts
represented some Stg160 billion for the banks.

The BOE and Treasury stress the FLS should be seen as a complement
to their other policies to support the economy, including quantitative
easing, rather than as a substitute.

“The FLS will support the flow of credit to where it is needed,
complementing the MPC’s asset purchase programme in easing monetary
policy conditions,” Chancellor of the Exchequer George Osborne said in
an open letter to BOE Governor Mervyn King.

Osborne added that the scheme showed the BOE and Treasury “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.”

King stressed the scheme should result in cheaper and more readily
available credit to both households and business.

The Treasury is not indemnifying the BOE for the FLS. The
conservative haircuts on the collateral suggest there should be no
losses except in extreme circumstances, and if this happened the BOE’s
own capital base would be hit.

As the scheme is not indemnified and qualifies as a central banking
operation, it will not face any problems from the European Commission on
state aid grounds.

The bank lending covered by the FLS is for all private
non-financial corporations and households. As a result, it does not
replicate the National Loan Guarantee Scheme which the Treasury set up
for small to medium-sized businesses.

It also should, in theory, feed through to cheaper and more readily
available mortgage lending.

-London newsroom: +44 207 862 7491 email:
drobinson@marketnews.com/dthomas@marketnews.com

[TOPICS: M$B$$$,M$$BE$]