Low interest loans of up to £140bn will be secured on bank assets of any grade
Shares in UK banks rose today on news the Bank of England is planning to launch two further stimulus packages in an effort to boost the flagging UK economy.
The latest funding programme will come in the form of cheap loans worth up to £140 billion, on the basis the banks will use that money to increase lending.
These new loans will be in place “within weeks”, Bank of England governor Sir Mervin King said.
Those loans, which the Bank of England has set no limit on, will have maturity dates of up to four years from the date issued.
Loans are likely to come in the form of Treasury Bonds, though short-term cash loans will also be considered, and it is yet unclear if those loans will ultimately be backed by the taxpayer.
A further stimulus package, called the Extended Collateral Term Repo Facility, will extend short-term loans of up to £5 billion a month to cover short-term funding shortfalls.
Similar so-called 'discount window' schemes were introduced by the US Federal Reserve in 2008 to help US banks meet short-term funding shortfalls, which UK banks had also accessed between February 2008 and January 2010.
The Bank of England also currently operates a low-interest loan facility to UK banks for six-month lending.
Under the new lending scheme, banks will be able to access new credit backed by any asset they have, which may include assets classed as subprime.
The Bank of England's explicit guarantee to provide more cheap credit to UK banks saw shares in UK bailed-out banks, Lloyds Banking Group and Royal Bank of Scotland rise by 4.8 per cent and 7.2 per cent respectively in early trading today.
Shares in Barclays rose more than five per cent and HSBC more than two per cent.
The Bank of England has already provided £325 billion in stimulus packages through its quantitative easing programme.
Quantitative easing works through the Bank of England buying up government bonds to then sell on to the banks, who in theory are supposed to use that money to fund other asset buys and in turn release new capital to stimulate the economy.
However, there is little evidence on the ground that money is filterin into the wider economy.
There is no provision in previous quantitative easing programmes which forces the banks to lend that money out to the wider economy, and the programme has been criticised as banks have simply held on to the money, which they have used to bolster their own capital positions.
A report published by economist Dhaval Joshi in 2011 suggested quantitative easing was being used to pay the wealthy at the expense of the poor.
Joshi argued real wages in the UK and United States - where quantitative easing is being used to boost economic growth - have fallen in real terms.
He said: "Real wages and salaries have fallen by £4 billion. Profits are up by £11 billion.
"The spoils of the recovery have been shared in the most unequal of ways."
Sir Mervin made the announcement last night at the annual Mansion House dinner for City of London financiers, which he said was in response to higher funding costs as a result of the eurozone crisis.
Further deterioration in the global economy, with signs of a slowdown in India and China as well as continued uncertainty at home leading businesses and consumers to cut back on spending, are adding to the “ugly picture” Sir Mervin said.
As such, the Bank of England said further stimulus is required.
Sir Mervyn warned of "a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole" which has led to businesses and households "battening down the hatches to prepare for the storms ahead".
“The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth,” he added.
More info on the UK quantitative easing programme can be found here