By Daniel Hunter

A new scheme, first announced on July 13th, to prompt banks and other lenders to make more money available to homeowners and businesses has come into operation.

The Bank of England and HM Treasury announced the launch of the Funding for Lending Scheme (FLS) last month, and have now seen it launched into working operation.

“Rising borrowing costs have held back the growth ambition of many small and medium-sized firms. This scheme should support banks to make finance more affordable to businesses and consumers, while also encouraging banks to lend more," John Cridland, CBI Director-General, said.

“The Funding for Lending Scheme is likely to naturally replace the National Loan Guarantee Scheme overtime because it is a bigger scheme that is open to a broader range of firms.”

The FLS is designed to boost lending to the real economy. Banks and building societies that increase lending to UK households and businesses will be able to borrow more in the FLS, and do so at lower cost than those that scale back lending.

The introduction of the FLS occurs against the backdrop of a euro-area debt crisis which has revealed severe vulnerabilities in the European banking system and has led to a marked deterioration in the outlook for the UK economy over the past twelve months.

In spite of the policy actions of the authorities, the flow of credit through the banking system – which households and many businesses necessarily rely on – has remained impaired. The FLS is designed to tackle this problem by reducing the price at which banks and building societies are able to fund themselves.

“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," Mervyn King, the Governor of the Bank of England said.

"That will encourage banks to make loans to families and businesses both cheaper and more easily available."

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