TESCO Bank has thrown down the gauntlet to the established High Street names by pledging to use the Bank of England's Funding for Lending (FFL) scheme to advance £1 billion of loans to customers and cut key rates.

All of the UK's big banks, excluding HSBC, plus a number of smaller institutions have signed up to the FFL scheme, which is designed to stimulate the economy by making cheaper loans available to firms and individuals.

Benny Higgins, chief executive of the Edinburgh-based bank, told The Herald: "The Government and the Bank of England have created this scheme with the very clear purpose of attempting to make credit more available and more affordable.

"We are doing the right thing for Tesco customers. We are taking advantage of cheaper funding to enable us to pass it on as cheaper borrowing to customers."

There have been concerns that banks will use the lower- cost FFL money to boost margins rather than markedly increase lending or cut interest rates.

The scheme's initial impact appears to have been muted with the Council for Mortgage Lenders estimating yesterday that total gross lending was £11.6bn in September, 10% lower than August and 15% less than a year ago. The CML said this was due to falling house sales.

Tesco Bank unveiled a new two-year fixed rate mortgage deal with an initial rate of 1.99%, down from 2.64% and a fee cut from £1100 to £800.

Mr Higgins said: "We are committed to responsible lending and hope to enable our customers to borrow a further £1bn, over the next year, at affordable rates."

The chief executive said Tesco Bank, which plans to bring out a cash ISA later this year, will continue to offer "competitive" interest rates on savings.