Article Summary - Research Paper Example

Now as per the new initiatives, the banks’ lending loans would be able to borrow extra ?5 from FLS for every ?1 they lend to businesses (BBC, 2013, April 24). The extension has been widely accepted but some economic experts still feel that more aggressive actions need to be taken in this regard. Upcoming report for national statistics is expected to show that economy remains flat. Funding for Lending Scheme (FLS) was introduced in August 2012 to bring an increase in bank lending by around ?60bn. Main hope is that this initiative will help keeping economy out of recession and improve the lending and borrowing cycle.

Banks borrow finds from Bank of England cheaply and the then passes it on as low interest loans to households and small businesses. The main objective is give incentives to businesses to borrow more money from the banks but there are fears that individuals might not want to borrow much at the current moment of time. Initial responses from the scheme has not been as encouraging as only few banks stepped in the first quarter but the program gradually took off. This scheme has negatively affected the savers and investors in bank deposits as they now have less interest to get and the lending institutions are not pushed to encourage people to invest in savings accounts.

Savings account offerings have gone down to 3% now. The mechanism for Funding and lending scheme is that when lenders approach bank of England, they swap their assets with the bank. And treasury bills are provided to them in return. Then the banks borrow cheap money from other lending institutions in wholesale financial markets with the backing of these treasury bills. The commercial banks are then able to use these bits of paper as top quality backing with which to borrow cash in the wholesale financial markets, from other lenders.

With the Treasury's backing, the idea is that they will be able to borrow funds at very cheap rates. To keep performance levels in check initially the banks will access 5% of funds they lend and as their lending increases, they can borrow more. On the other end if the lending decreases, then the banks will have to pay interest of 1.5% as compared to just 0.25% at initial stage. For the protection of tax payer’s bank of England uses the concept of hair cut. The banks will have to pledge the collateral more than worth of papers being issued by the Bank of England.

In this case if a bank borrows ?1 Treasury bill then it has to pledge more than ?1, amount such as ?1.10 to ?1.20. So if the value of asset falls then tax payers would be somewhat protected as the bank of England would not suffer top slice of the loss. Analysis: Positive Chain reaction: On the face of it, it seems to be a good scheme as more economic activity can be generated on microeconomic level and the economy of England can have a positive effect due to that. If more money is available to the people than they can open new businesses, which in turn will generate more jobs.

This can lead to increase in purchasing patterns of general public, which is healthy for businesses in return. Due to increased jobs and earnings, people have more money available to save, which is usually deposited in banks. The banks can then lend that money to businesses and earn their interests as well. So this scheme is aimed to achieve this positive chain reaction. Many economists has positive expectations from this scheme and there is a hope among representative party in England that this scheme might be a breakthrough initiative