The government's Funding for Lending scheme gets under way today - the government and the Bank's biggest joint effort so far to get lending going to the rest of the economy. So how will it actually work? And will it succeed where other smaller plans have not quite lived up to expectation?
- How will it actually work?
The high street banks will able to apply for £80 billion of cheap loans from the Bank of England over the next eighteen months. They'll have to put up collateral, and will have to pay the loans back after four years. But the total the Bank might lend eventually could be far higher.
If a high street bank increases the amount it lends to customers, they will be able to access more of that cheap cash. It is very hard to tell how much the final total will be.
But as things stand the Bank of England has capacity to lend up to 160 billion to the banks. To try to push the banks in the right direction, if the amount they lend drops they will be penalised by having to pay more interest on those cheap loans.
- Why is it different to previous schemes?
It is much bigger in scale and is designed to encourage lending to every part of the economy, rather than just focusing on lending to SMEs. The banks have a powerful incentive to use it because they can access rock bottom rates.
And it provides a new incentive for them to get money out of the door - they'll be penalised financially if the amount they lose falls.
- Will it make any difference?
The prospect of all that cheap cash has already made a difference to the cost of some deals out there. RBS has already dropped the price of some SME loans for example. Some mortgage prices have already fallen.
- Will people who have been turned down for lending now be able to access cash?
As far as mortgages are concerned the scheme is likely to make it cheaper for people who already have big deposits. But it seems unlikely that it will really help out people who aren't lucky enough to be in that position.
Equally, it seems likely that it will provide better deals for businesses who are already judged to be a good bet, but it there is no guarantee it will suddenly turn on the taps of credit for people who have been turned down.
- What is the bigger picture?
Funding for lending should ease the supply of credit. But it cannot on its own create the demand for it. So many businesses and consumers are not remotely interested in borrowing at the moment because they are so nervous about the prospects for the economy.
And while the scheme has been designed to get the banks to lend more, the Bank of England and Treasury came up with it because of the worsening picture in the Eurozone.
In truth Funding for Lending is not just about getting cash to consumers and companies, it is also about making sure there is a ready supply of cheap money so our banks can keep going in case of a Eurozone meltdown.