Bank Underground (Bank of England blog)

A Public-Private Partnership: Central Banks as a Funding Backstop

The authors analyze the Bank of England’s 2012 Funding for Lending Scheme (FLS) and find that central‑bank liquidity acts as a backstop that improves private wholesale funding conditions rather than merely substituting for them. By lowering banks’ wholesale funding costs, the scheme triggers an “equilibrium effect” that reduces mortgage rates even for banks that do not draw on the FLS directly. The study also shows that the conditionality attached to central‑bank funding influences banks’ behavior, with unconditional funding prompting more aggressive mortgage origination. Overall, the credit‑supply boost from the FLS exceeds what direct participation alone would suggest.