Banks’ net lending falls despite their billions from the FLS

Net lending from banks and building societies has been negative since the Bank of England launched its flagship Funding for Lending Scheme, figures from Threadneedle Street showed yesterday. Over the four quarters to June participating institutions in the FLS contracted their loan books by £2.3bn, despite drawing down a cumulative £17.6bn of cheap funding from the scheme.

Net lending over the second quarter of 2013 rose by £1.6bn, having contracted by £1bn over the first quarter. The biggest lenders were Nationwide and Lloyds, which expanded their loan books by £2.2bn and £1.3bn respectively. However, none of the big players drew down funds under the FLS in the second quarter and most of the cheap official funds were accessed by mortgage lenders including Tesco Bank, Yorkshire Building Society and Virgin Money. Santander paid back £900m in loans, saying that it was now able to source cheaper funds from elsewhere.

Banks have been increasing their mortgage loans in recent months as house prices have risen, but lending to small and medium size businesses has remained weak. Last month official figures from the Bank of England showed that net lending to SMEs fell by £300m in July.

The Bank of England, led by the new Governor, Mark Carney, below, argued that net lending would have contracted by more in the absence of the FLS and pointed out that interest rates on mortgages and personal loans had fallen “significantly” since its launch in August 2012.

“The FLS is continuing to support lending to the UK economy with a range of indicators suggesting that credit conditions are steadily improving for households and firms,” the Bank’s executive director for markets, Paul Fisher, said.

Under the FLS’s terms, participating banks can access cheap funding equivalent to 5 per cent of the aggregate size of their loan books in August 2012. For the banks this equates to about £70bn.

In April the Bank announced the FLS would be beefed up and extended for an extra year to encourage more bank lending to SMEs.