Fears of failure for Bank lending scheme

The Bank of England is poised to deliver the first verdict on its flagship scheme to boost lending in the economy tomorrow, amid growing fears of an early flop.

Threadneedle Street launched the Funding for Lending Scheme (FLS), which allows financial institutions to access cheap funds in return for maintaining or increasing lending, in August. Some 30 lenders, including all the UK's biggest banks and mutuals except HSBC, signed up.

The Bank, which took stock of the banks' lending levels at the end of June, will publish figures on how much participants have increased credit in first three months of the FLS.

Despite initial hopes that the scheme would help the financial system to grow net lending by as much as £80bn or 5 per cent, analysts are more pessimistic.

Jens Larsen, the chief European economist at RBC Capital Markets, said: "Given that we are just two or three months into the scheme, it is likely to be something more in the order of £10bn."

FLS works by allowing participating banks to swap eligible collateral for Treasury bills, short-term debt which is effectively as good as cash. For lenders maintaining or growing lending, the charge is 0.25 per cent plus Bank rate of 0.5 per cent. For banks whose lending declines, the fee increases by 0.25 per cent for each 1 per cent fall in lending, up to a maximum fee of 1.5 per cent.

Interest rates on mortgage loans have fallen as a result of the scheme, although figures from the Bank showed a 0.2 per cent rise in the rate charged on new corporate loans in October, leaving the average rate at the highest since January 2009. Savings rates have also suffered as banks use the cheaper funds from the Bank rather than attract retail deposits.