Announcing a new massive stimulus package and a cut to interest rates, Bank of England governor Mark Carney has told banks they have no excuse to stop lending to the real economy.
As part of today's package a new £100bn scheme was announced which will see the Bank printing cash in order to finance cheap loans from banks.
The programme, called the Term Funding Scheme (TFS), will reduce the cost of borrowing for banks from around one per cent to the Bank of England's new base rate of 0.25 per cent.
The new system is designed to accelerate the speed at which lower borrowing costs find their way through to the real economy.
Carney heaped pressure on banks to make sure they follow his wishes and lending does not seize up in the wake of the UK's decision to leave the EU.
He said: "Banks have no excuse with today's announcement not to pass on this cut on bank rate."
Referring the the letter sent by RBS to 1.3 million business customers stressing that negative rates would mean they would have to charge them to hold deposits, Carney added: "They should write to their customers to make that point."
The TFS scheme is designed to completely offset the pressure lower interest rates places on bank profitability. A report out yesterday said lower interest rates would wipe £1.4bn from the profits of the UK's top 21 retail lenders.
"We have very carefully calibrated the sizing of the TFS to neutralise this effect, so in aggregate there is no reward for the banks and no penalties for the banks," Carney said.
Share prices in UK banks climbed on the announcement of the package - which is seen as a much simpler and more stimulative approach to providing cheap loans than the old funding for lending scheme.
Barclays was up 1.7 per cent, RBS climbed one per cent and Lloyds was up 1.1 per cent.
What is the new Term Funding Scheme (TFS)?
The TFS is designed to help banks in the low interest rate environment while also promoting lending to the real economy.
Banks will be able to secure loans directly from the Bank of England, with Threadneedle Street printing money to finance the scheme. The total amount a bank can apply for will be initially capped at 5 per cent of their total loan book.
If every bank takes up its allocation, an extra £100bn of new cash will be pumped into the economy.
Loans will be offered at the Bank’s base rate - now 0.25 per cent - as long as banks total lending does not shrink. For every one percentage point a bank’s net lending falls, the costs of the scheme will rise by five basis points up to a maximum of 0.5 per cent.
The MPC hopes this will drive down borrowing costs and make sure the effects of the interest rate cut are felt in the real economy. The TFS is similar to the old funding for lending scheme but less convoluted as it involves direct monetary easing by printing more cash, rather than a complex exchange of guarantees and government debt.