Has the Bank of England loan scheme failed?

bank of england

The Bank of England provided £16.5bn of cheap loans to the banks between the launch of its Funding for Lending Scheme last August and the end of March this year.

So what happened to the provision of credit by banks to UK households and businesses during those eight months?

Well, according to new statistics published on Monday by the Bank, net lending fell by £1.8bn, representing a reduction in the total stock of loans of 0.1%.

To put it another way, the banks borrowed quite a large sum, at the attractive interest rate of 0.75% - which it's not completely misleading to say is cheap money provided by us, by the state - and did not pass that money on to us.

Or so it would seem.

'Honourable mention'

But that is not quite the whole story. The Bank and the Treasury say that the banks have - in effect - transmitted the subsidy they have received by cutting mortgage rates and business-loan interest rates.

So to the extent that is so, they have increased the spending and investing power of households and businesses.

But perhaps what is most striking about the statistics is the very varied lending performance of different banks.

So, for example, Barclays and Nationwide have increased their net lending very substantially - by £6.8bn and £4.8bn respectively.

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Although such prudence may be good for their owners, in the short term it will dampen economic recovery.”

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Other impressive performers were Coventry Building Society, Virgin Money and Tesco Bank, all of which boosted their lending by more than £1bn each. And Aldermore, the specialist business bank, deserves an honourable mention, having borrowed £475m from the scheme and lent £710m.

On this evidence, simpler banks and those that made fewer egregious errors in the boom years are now providing better service to the economy, by greasing its wheels with loans.

By contrast - and what a contrast - Santander borrowed £1bn and shrunk its overall lending by a striking £8.6bn.

Which doesn't of course suggest that Santander is a weak bank in the UK. But it does imply that its Spanish parent is rather keen that all its operations conserve capital and tread carefully - presumably so that the group as a whole can absorb whatever shocks may be still to come in Spain's ailing economy.

'Healthy desire'

Also Lloyds borrowed £3bn and reduced the size of its loan book by £6.6bn.

And Royal Bank of Scotland borrowed £750m, and cut its lending by £4bn.

Lloyds insists that the figures are misleading - in that it says, for example, that it has been increasing its net lending to the economically important small-and-medium-size business sector.

RBS also recently said that its "core" lending to small and medium size businesses rose 1% in the first three months of the year.

Both would say that the diminution of their lending reflects a healthy desire on their part to get out of peripheral or excessively risky activities.

But although such prudence may be good for their owners, including us in the semi-nationalised Lloyds and RBS, in the short term it will dampen economic recovery.

So here's the impossible-to-measure scary counterfactual: if the Bank of England hadn't chucked all that cheap money at the banks, how much tighter would credit have become, and how much more sluggish would our hard-to-spot economic revival have been?

Update 16:00:

There is another striking number in the latest statistical update on Funding for Lending - which is that in the latest quarter, the biggest borrower from the scheme by a wide margin was the Co-operative Bank.

This weakened bank, which is in the tortuous process of trying to fill a substantial hole in its capital resources, borrowed £900m from the Bank in the three months to 31 March - which is £400m more than any other bank borrowed in the same period, and makes the Co-op the fifth biggest debtor of the Bank under the scheme.

The Co-op is a long way from being the fifth biggest bank in Britain and this sum represents more than 2.5% of all its deposits. For the Co-op, it is a non-trivial sum.

Now in these three months, the Co-op shrunk its lending, by a tiny amount. So it either sat on the cash or used it to repay creditors and depositors who wanted their money back.

And given that the Co-op recently decided not to take on any new business customers, it is reasonable to assume that it has not gone on any kind of lending spree since.

Anyway, to state the bloomin' obvious, this loan to the Co-op by the Bank of England shows that the Bank has a powerful direct financial interest in an orderly solution to the Co-op's current difficulties.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 180.

    177 Fighting Fit

    Govt has given up on banks delivering business funding - Young Enterprise Loan Scheme organised by Lord Young / James Caan has purposely bypassed the mainstream banks.

    See my post at 149 for an alternative

  • rate this

    Comment number 179.

    As a small business owner of 20 years I have to say that borrowing from banks is not a good idea & having had this conversation with suppliers & customers over the years I'm not alone in this view.
    We do put our money back into our business, most successful business from the outside look poor, no new cars or new carpets to be seen, income comes from the product and customer satisfaction.

  • rate this

    Comment number 178.

    17 United Dreamer
    Many successful businesses grow by ploughing back retained profits and raising equity capital.
    Many would dispute the "advantages" of high leverage which has been (over) encouraged by low interest rates and the activities of private equity.

  • rate this

    Comment number 177.

    Only way to get money into the hands of small businesses and first time buyers is for the government to do it, surely the answer lies with RBS and HBoS? Maybe that would drive competitive lending?

  • rate this

    Comment number 176.

    175 UD back to business school - debt is not the only form of capital. Small businesses mostly use retained earnings & equity to fund work in progress because they cant get anything else. Banks are extremely thinly capitalised and that is the problem. Sensible businesses limit leverage. In capitalism its much more stable to require surplus capital to be put at risk rather than secured as debt.

  • rate this

    Comment number 175.

    "174. alan
    Businesses can and should grow by ploughing back profits and/or issuing new equity capital rather than increasing their debt."

    So resist pursuing business opportunities until the profits are available for the required investment? Even if payment is post contract completion meaning you can't pay wages until delivery? Business can't work that way.

  • rate this

    Comment number 174.

    Businesses can and should grow by ploughing back profits and/or issuing new equity capital rather than increasing their debt.
    Consumers should buy less and then use retained earnings known as savings to buy things.
    Isn't that what the Germans do?
    Do we really want to have an economy based on people buying things they don't need with money they don't have?

  • rate this

    Comment number 173.

    How that lying idiot Stephen Hester (RBS CEO) was allowed to claim that businesses did not want the money the RBS was willing to lend is beyond me, it went unchallenged in all the national media.
    From personal experience the Banks are the sole reason the coutry is in a mess and their inability to loan to small businesses will extend the recession by as much as ten years.

  • rate this

    Comment number 172.

    This crony socialism must stop....

    Why is it acceptable for the government owned BoE to lend one set of companies (banks) money at 0.5% which is then leveraged up and lent on to other companies at a far higher rate of interest? I would like to have the 0.5% rate...

  • rate this

    Comment number 171.

    So the BoE lent these banks cheap money so they could lend it out and the banks ended up holding on to it to make their balance sheets look good so when theyre tested for capital reserves they pass, im thinking i should be an economist im as dumb as they are. Governtments and banks are doing their hardest to keep house prices extortionately high, will end in tears.

  • rate this

    Comment number 170.

    Here is a nice one for the BBC - Why don't you report who/what is actually behind these payday lenders...... could it be that taxpayers money is somehow being lent back to the taxpayer at phenomenal rates of interest?

  • rate this

    Comment number 169.

    If its working, then why do we have masses of payday lenders and loan sharks fleecing the most vulnerable....

  • rate this

    Comment number 168.

    We need the government to make rent control universal, this will slash the returns on buy to let investments and help swing the market back to owner occupiers.... but I expect that to happen right after pigs evolve wings.

  • rate this

    Comment number 167.

    Si if I have this right, Santander is using cheap money supplied to it by the UK taxpayer, to shore up its Spanish operation?

  • rate this

    Comment number 166.

    Can someone explain why we even need a Bank of England again?

  • rate this

    Comment number 165.

    In a way it has worked, at least for its undeclared (probably overriding) objective:

    It's propped up property prices, saving banks' balance sheets. Because of the former, as JfH reminds us with admirable persistence, the popular economy is near-extinct.

  • rate this

    Comment number 164.

    There is one area Funding for Lending has been a massive success: it has utterly annihilated savers. The BoE happily throws savers to the wolves to protect borrowers with a toxic combination of low rates and high inflation, now cheap money thrown at banks means they no longer need attract depositors. Predictably, the banks have hoarded the cash and slashed saving rates massively.

  • rate this

    Comment number 163.

    had a Auz dollar term account that's matured no bank here or offshore willing to reinvest capital .BoE action has removed untold number saving accounts from market with the effect that will cost us dear

  • rate this

    Comment number 162.

    The answer to the question you pose, Robert, is a resounding YES! The scheme has failed.

  • rate this

    Comment number 161.

    Has nobody thought of the basic concept of making it a requirement of borrowing money from the Bank of England that it is lent on to businesses & citizens at reasonable rates? As it is banks are getting cheap money & either hoarding it or charging vastly inflated rates of interest, making a packet to the detriment of the citizens who provide the BoE's money in the first place. Not fair.


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