By Marcus Leach

News that the Bank of England and HM Treasury are to launch a new scheme to boost lending to the real economy has been welcomed by both the Institute of Directors and the British Chambers of Commerce.

The Funding for Lending Scheme (FLS) will see banks and building societies increase lending to UK households and businesses, and thus be able to borrow more in the FLS, and do so at lower cost than those that banks 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.

Commenting on the launch of the scheme Graeme Leach, Chief Economist at the Institute of Directors, said it was welcomed, but did offer a word of caution.

“Entrenched problems require innovative solutions and the Funding for Lending Scheme is an imaginative attempt to boost bank lending. Whereas Project Merlin was all about targets, the Funding for Lending Scheme is all about incentives," he said.

“The Funding for Lending Scheme provides real incentives for the banks to lend more using the ‘collateral swap’ with the Bank of England. The Bank of England will lend Treasury Bills to the banks, in the hope that they will use them to provide more and cheaper loans to companies and consumers. And the more the banks lend, the cheaper it will be for them to fund that lending.

“All in all it’s a very sensible package, which the IoD welcomes. But there’s one snag: improving the supply of loans matters little if companies and consumers don’t have the confidence to borrow. The Governor and the Chancellor should be complemented for their innovation, but only time will tell if it is a success”.

Dr Adam Marshall, Director of Policy at the British Chambers of Commerce, said the scheme must have a real impact on new and growing firms.

“Exceptional times call for exceptional measures, especially when it comes to bolstering the flow of credit to businesses in the real economy. We hope this intervention will succeed in incentivising lending to viable firms that want to invest and grow," he said.

“Businesses will want to understand how Funding for Lending will benefit them in a real and tangible way, so we will wait to see how the banks intend to make this increased lending capacity a reality. We will be watching closely to see if this has any positive impact for new and growing businesses, which have largely been frozen out of the market for finance in recent years.

“The Bank of England and the government must make sure this is not another false dawn in the provision of business finance. As they roll out Funding for Lending, they should be even more radical and plan for the creation of a bona fide business bank in the medium to long-term.”

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