Funding for Lending: Loans rise as scheme starts

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Lending to households and businesses increased slightly in the third quarter of the year as a new scheme began.

Banks took up £4.4bn in cheap funding from the Bank of England through the new Funding for Lending scheme, and their total net lending rose by £496m.

However, the Bank of England said it was too early to reach any conclusions on how effective the scheme had been.

The figures showed that lending by four major UK High Street banks in fact fell during the same period.

Lloyds Banking Group, RBS, Santander, and Co-op all reported drops in their lending during the three months to the end of September.

The Bank's Funding for Lending scheme (FLS) was launched in August to try to encourage more lending to households and businesses.

As the scheme was only launched in August, the Bank said that it might take time for the funding to flow through to the economy, owing to the time lag in applications, approvals, and drawing on loans.

Participating banks' net lending changes

  • Santander: down £3.5bn
  • Lloyds Banking Group: down £2.8bn
  • RBS: down £642m
  • Barclays: up £3.8bn
  • Nationwide: up £1.8bn
  • Leeds Building Society: up £212m

"I am confident that the FLS will help the supply of credit. The incentives in the scheme are for banks and building societies to cut lending rates and hence lend more to get the cheapest funding," said Paul Fisher, executive director for markets at the Bank of England.

"But it is too early to use these data as a reliable indication of the impact of the FLS on lending volumes."

Mortgage impact

Some 35 lenders are taking part in the scheme, though not HSBC. The aim is to increase bank lending by roughly £60bn by January 2014.

Under the terms of the scheme, the Bank of England allows commercial banks to borrow funds from it at an interest rate of just 0.25%.

However, only six institutions had taken advantage of this cheap funding by the end of September.

How Funding for Lending works

  • Banks and building societies can initially borrow Treasury bills up to 5% of the amount they currently lend
  • They are charged just 0.25% interest, much lower than the going rate
  • They can borrow more than 5%, only if they increase their overall lending
  • If they decrease lending, the interest rate will increase up to 1.5%
  • The banks use the Treasury bills as backing to buy money cheaply on the financial markets. It is this money that they then lend out
  • The Bank of England and taxpayers will be protected from any losses made on the loans agreed by the banks with homes or firms, because the banks will have to provide collateral to the Bank of England of a higher value than the loans
  • Lending levels to be monitored by the Bank of England

During the third quarter - which takes in the first two months of the scheme's operation - net lending by Barclays increased by £3.8bn, and rose by £1.8bn at Nationwide Building Society.

Stephen Cooper, a director at Barclays bank, said: "People are still choosing to pay down debt and I think confidence needs to improve further, particularly for business owners, before they decide to invest."

"What I am hoping FLS will do is stimulate that demand, and improve that confidence."

Andrew Baddeley-Chappell, a senior executive of the Nationwide, said: "We have been actively lending more for some time, though FLS has clearly been helping that, both for first-time buyers and existing customers who are moving home."

"It is absolutely clear that FLS has had a significant impact on the price of mortgages, and it is hoped by all that the impact of those lower prices will be to encourage increased activity in the market."

On the other side of the coin, net lending fell by nearly £3.5bn at Santander, by almost £2.8bn at Lloyds Banking Group, and by £642m at RBS, despite all accessing the new supply of funds.

RBS said the scheme had still allowed it to cut the costs faced by small businesses to borrow money. Lloyds said it was planning to apply for another £2bn on the cheaper terms by the end of December, to add to the £1bn already drawn by the end of September.

More competition

The Bank's figures do not reveal what the level of lending might have been if the Funding for Lending scheme had not been introduced.

The overall increase in the quarter of £496m remains a tiny proportion of the total stock of outstanding loans by the participating banks, accounting for just 0.04%.

"As the scheme embeds in banks, we should continue to see the scheme acting as a driver for competition, benefiting all borrowers and therefore the wider economy," said the British Bankers' Association.

But John Walker, national chairman of the Federation of Small Businesses, said: "What is needed is more competition and choice for small businesses to access finance."

"Our data tells us that around four in 10 small firms were refused loans in the third quarter."

Andrew Bowyer is a director of a Leicester engineering consultancy called Magna Parva, which specialises in designing equipment for the space industry.

He recently wanted to borrow £25,000 from the firm's bank to upgrade expensive computer software, but he baulked at its insistence that he and his co-director must put up their own homes as security for the loan.

"We turned the loan down, and many firms will do the same," he said.

"The knock-on effect is that borrowing will drop, and the economy will just slow down."

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