Only six banks and building societies used the Government’s ground-breaking scheme to drive cheap loans through to households and businesses in its first two months of operation and they withdrew £1.04bn from the economy.
According to the first figures on the Bank of England’s Funding for Lending Scheme (FLS), six lenders drew on it for £4.36bn but only three of them increased lending.
Analysis of the data will reinforce concerns voiced by Federation of Small Businesses chairman John Walker that the FLS has so far proved “disappointing”. He said he was not confident it would help small companies because it “does not help firms access credit, it only makes credit cheaper to those successful in their loan applications”.
The FLS was launched on August 1 to boost lending and lower household and business borrowing costs by offering the banks a cheap source of finance. It is now widely seen as the Bank’s main active policy tool to help drive the recovery.
However, the data showed the FLS got off to a slow start. Of the six lenders that used the scheme, part-nationalised Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (RBS (LSE: RBS.L - news) ) reduced net lending by £2.77bn and £642m respectively in the three months to September 30, and Santander (Madrid: SAN.MC - news) cut it by £3.47bn.
Paul Fisher, executive director for markets at the Bank of England, said: “I am confident that the FLS will help the supply of credit. But it is too early to use these data as a reliable indication of the impact of the FLS on lending volumes.” Official sources pointed out that banks’ lending plans would have been in place before the scheme was in place.
Since the FLS was launched, banks’ funding costs have fallen by a percentage point more than in the US or Europe (Chicago Options: ^REURUSD - news) and the cheaper costs appear to be leading to better rates for borrowers. Last week, HSBC (LSE: HSBA.L - news) launched the lowest ever two-year fixed-rate mortgage deal of 1.99pc. Lloyds and RBS yesterday claimed the FLS had allowed them to cut rates on small business loans by more than percentage point.
However, Citi’s UK economist Michael Saunders said: “Use of the FLS has been disappointingly small so far... At this stage, it seems unlikely that the FLS will alter the UK’s weak economic outlook.”
At the end of September, just 13 banks and building societies had signed up to the scheme, although participation has since risen to 35. Including the 29 that had not used the scheme by September, net lending rose over the three months by £496m.
Lloyds has committed to drawing another £2bn, on top of the £1bn already taken, and pledged to “pass on the discount of one percentage point for new term lending” to businesses mortgage borrowers. RBS said its net lending figures were distorted by the non-core bank of toxic assets that are in run-off. Excluding them, lending in the core bank rose by £412m in the three months.
As it stands, the arrangement may lower funding costs by £650m so long as the 35 participating banks’ total £1.3 trillion stock of lending does not decline.