The “Funding for Lending” scheme – a joint venture by the Treasury and the Bank of England - is designed to incentivise banks and building societies to boost their lending to UK households and non-financial companies.
As part of the scheme commercial banks will be able to exchange collateral, such as existing loans for pieces of paper known as Treasury bills, on which they will pay an interest rate of 0.25 percent.
Banks and other lenders will then be able to use these bills as backing with which to borrow cash cheaply on the wholesale markets, money they can then lend onto homes and firms.
Unveiling the scheme, the Chancellor George Osborne confirmed that it would ultimately supersede the £20 billion National Loan Guarantee Scheme, which was launched earlier this year in a bid to boost lending to businesses.
Mr Osborne, said: “The National Loan Guarantee Scheme has made a real difference, with over 16,000 cheaper loans worth over £2.5bn already offered to businesses across the UK.
“In many cases, the money saved has meant an extra person employed who otherwise still might be looking for work.”
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