The UK banking industry stands accused of hoarding cash to shore up balance sheets during the financial crisis. Money that should be lent to growing businesses and first-time buyers has been squirrelled away into Gringott’s-style vaults and guarded by three-headed Bull Terriers. But that’s all about to change.
It was just a twinkle in Mervyn King’s eye a fortnight ago. But from today, through the Funding for Lending (FLS) initiative, the Bank of England will lend money (£80bn at the last count) at 0.25%, far below market rates, to financial institutions. This is on the understanding that the cheap rates will then be passed on to borrowers. The aim: to kickstart the economy by supporting small businesses and inject new life into the flagging property market.
And unlike through quantitative easing, the BoE is going to be keeping tabs on the cash it doles out. If banks aren’t seen to be passing on these loans, then ‘Abracadabra’, the pot of cash will disappear.
It sounds like a fairly robust scheme. But critics have raised concerns over which borrowers will benefit. Over the past few weeks, several banks have already taken it upon themselves to slash mortgage rates drastically, in order to pull in the business. But these new 3% fixed-rate deals are only available to a small percentage of borrowers who can put up a 40% deposit, freezing out most first-time buyers.
The banks haven’t been as keen to up their small business lending, however. Over the past four years, the value of outstanding loans to non-financial companies has shrunk 17% from its peak, to £420bn in June this year.
Will the FLS really enforce change in this sector? Well, the good news is that a fair few lenders have now signed up: Royal Bank of Scotland, Lloyds Banking Group, Nationwide Building Society and Barclays, although HSBC says it will stick to using retail deposits. And every pound of additional lending these players hand out to SMEs is eligible for the scheme, which is a decent incentive.
But only time will tell. The BoE has given the scheme 18 months to make a difference. After that, it will disappear in a puff of smoke…