Direct intervention in bank lending

Overview

Direct intervention in the banking system, funding for Lending Scheme and term funding scheme.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is meant by direct intervention in the banking system?

   Model answer

   Direct intervention means a central bank acting on the quantity and price of bank lending itself. Schemes offer banks cheap funding on condition that they lend it on.

2. 2

   What was the Funding for Lending Scheme?

   Model answer

   The Funding for Lending Scheme offered banks cheap funding tied to how much they lent. The Bank of England and HM Treasury launched the scheme in July 2012.

3. 3

   How did the Funding for Lending Scheme try to increase lending?

   Model answer

   Banks that expanded lending to households and firms could borrow more cheaply from the Bank of England. Banks that shrank their lending faced a higher price.

4. 4

   Why was the Funding for Lending Scheme later refocused on business lending?

   Model answer

   Mortgage lending recovered quickly and the housing market began to overheat. Small firms still could not obtain credit on reasonable terms.

5. 5

   What is a term funding scheme?

   Model answer

   A term funding scheme lends to banks at close to Bank Rate for a period of years. Cheap term funding encourages banks to pass rate cuts on to customers.

6. 6

   Why do central banks intervene directly rather than rely on Bank Rate alone?

   Model answer

   A rate cut achieves nothing if banks will not lend at any price. Direct schemes stimulate lending activity inside the banking system itself.

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