Cheap lending scheme figures not showing promise

The government's Funding for Lending scheme, designed to boost bank lending by giving banks cheap cash, is proving to be a bit of a damp squib.

by Emma Haslett
Last Updated: 30 Aug 2013

Figures published this morning by the Bank of England suggest that the effect of the Funding for Lending scheme – the government’s wizard wheeze to make banks lend more to consumers and businesses by, essentially, providing them with cheap money – are disappointing.

Granted, the figures show that lending under the scheme hit £2.6bn during the first quarter – but that’s £6.9bn less than during the previous three months. And net lending by banks – the total amount lent to consumers and businesses – dropped by £300m, which suggests that although banks are making the most of the cheap cash laid on by the government, that isn’t translating to increased lending to businesses.

In fact, over the entire course of the scheme, £16.45bn has been lent to banks, while net lending has dropped by £1.8bn. Not a particularly great endorsement.

To be fair, none of the ‘Big Five’ banks – Barclays, Santander, Lloyds, RBS or HSBC – borrowed any money under the scheme during the quarter, although they’ve all borrowed from it in the past. The biggest borrower this quarter was the Co-Op, which drew down £900m (which is probably glad of anything it can get its hands on at the moment), while Nationwide, one of the UK’s biggest mortgage lenders, borrowed £500m and Coventry Building Society borrowed £400m.

Still, Bank of England executive director for markets says this is all part of the plan.

‘Flat lending growth overall is broadly as expected at this stage, reflecting reductions in some legacy portfolios being roughly offset in aggregate by expanding new lending,’ he says.

‘The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013.’

It’s only been 24 hours since Funding for Lending last hit the headlines. Yesterday’s papers reported that the Help to Buy scheme, an off-shoot of Funding for Lending which guarantees and/or subsidises 95% mortgages for first- and second-time buyers, could push up house prices by 8%. That isn’t exactly the effect the chancellor had in mind when he introduced the scheme, which was originally designed to increase demand, thereby increasing the number of houses built each year, thereby saving the construction industry. Here’s hoping there’s a Plan B…

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