Funding for Lending has an 'encouraging start'

At least 13 banks and building societies have signed up for the government's much-touted Funding for Lending Scheme, according to the Bank of England.

by Michael Northcott
Last Updated: 19 Aug 2013

Many have been sceptical about the government’s Funding for Lending Scheme (FLS), which frees up Bank of England cash to private banks at cheap rates, on the condition that they lend it more freely to people and companies. But today, the BoE has revealed that 13 banks have so far signed up to the scheme, which will offer them £80bn to lend out. Among them are Lloyds, Barclays, RBS, Santander and the new kid on the block, Virgin Money. A good start, for sure.

But what will the effect be? Well, these banks alone account for about 73% of all the lending that actually takes place in the UK. Lloyds is the largest single lender, with £443bn of loan liabilities currently on its books. Collectively these banks have lent £1.2 trillion in 2012 alone, which should give us a flavour of the power of lending if they can get even cheaper cash to dole out.

It looked like the scheme was getting off on a dodgy footing last month – loans to businesses dropped by £1.5bn in August, and firms’ debt repayments far exceeded the credit given out nationally. But only one month in, it is hard to tell what kind of effect the scheme will have. Presumably the idea is to tide things over with the FLS until Vince Cable’s new ‘business bank’ gets going (if it ever does). But if banks do start lending more freely, perhaps we will stand a chance of getting some growth next year, despite what the gloomsters predict…

The BoE’s executive director for markets, Paul Fisher, says that the effect of the scheme is already being felt. ‘We have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions,’ he said. So it is good news (if the BoE says it, then it must be true), but Fisher did add that the Bank may not be able to stop total lending coming down over the next 18 months because of global economic weather. And we all know just how well things are going across the Channel…

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