Slow start to Funding for Lending Scheme as banks snub cheap funds

 

The Government’s flagship Funding for Lending Scheme, designed to boost the sickly economy, has got off to an underwhelming start.

The Bank of England revealed today that just six out of the 35 lenders who signed up to the scheme have so far accessed the cheap funding, while total lending to the economy has grown by only £496 million while the FLS has been in operation.

Four banks — Barclays, Lloyds, Royal Bank of Scotland and Santander  — drew down a combined total of  £3.75 billion worth of cheap funding  under the FLS, which was launched in August. Two building societies, Nationwide and Leeds, also drew down  £610 million. But while net lending by Barclays, Nationwide and Leeds grew over the three months of the scheme, the loan books of RBS, Santander and Lloyds shrank.

The Treasury stressed it was “still early” to judge the effectiveness of the FLS, which allows lenders to  access subsidised funding worth up to  5% of their existing loan books, so  long as they use the money to make cheap loans to house buyers and  small businesses.

“Though it’ll take time to fully feed through, today’s positive data shows participating banks are increasing their lending,” said Sajid Javid, the economic secretary to the Treasury.

Paul Fisher, the BoE’s director for markets, also urged patience.

“I am confident that the FLS will help the supply of credit… But it is too early to use these data as a reliable indication of the impact,” he said.

The £4.36 billion of total funding accessed so far by lenders represents around 7% of the total available to them. The fact that the sector’s aggregate loan book has grown at all can be interpreted as a success given that in July the BoE judged that total UK lending was more likely to decline rather than increase over the next 18 months.

But while there have been signs of some easing of the availability of mortgage loans in recent months, small firms said today that they are not benefiting from the FLS.

“The scheme was designed to help businesses as well as homeowners, but evidence points to this helping the mortgage market more, perhaps due to the larger number of providers in this market,” said John Walker of the Federation of Small Businesses.

The total stock of loans to UK borrowers from RBS shrank by £642 million over the three months of the scheme’s operation, despite the partially nationalised lender accessing £750 million in funding. And the lending books of Lloyds, in which the Government also has a significant stake, contracted by £2.77 billion. The Spanish-owned Santander drew down £1 billion in state funding, but shrank its lending by  £3.5 billion. Though Barclays also drew down £1 billion of guarantees, its stock of lending expanded by £3.8 billion. Nationwide accessed £510 million and increased its loan book by £1.8 billion.

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