The Bank for International Settlements published a working paper analysing how central bank funding affects bank lending, using the United Kingdom’s Funding for Lending Scheme (FLS) as a case study. Based on detailed data on banks’ lending flows and funding sources, the paper concludes that the availability of central bank funding can support credit supply by reducing banks’ private wholesale funding costs, even when banks do not draw on the facility. The authors find that banks more exposed to stress in private wholesale funding markets used less central bank funding, consistent with an “equilibrium channel” in which the backstop lowers the price of private liquidity and stimulates lending by wholesale-funded banks. Using a surprise amendment to the FLS design, the analysis also suggests that adding stronger lending incentives or “strings attached” to the facility can weaken this backstop effect, implying a trade-off between maximising broad support for credit supply and targeting lending to specific sectors.
Bank for International Settlements 2026-03-12
Bank for International Settlements research finds central bank funding can support lending via lower private funding costs but incentive strings may weaken the effect
The Bank for International Settlements released a paper examining central bank funding's impact on bank lending, using the UK's Funding for Lending Scheme. It finds that central bank funding can enhance credit supply by lowering private wholesale funding costs, even if banks don't use the facility. However, stronger lending incentives may reduce this effect, highlighting a trade-off between broad credit support and targeted sector lending.