LONDON: Britain’s flagship scheme to encourage banks to pump more credit into the economy failed to boost lending in its first year, data showed, as banks focused on meeting tougher capital demands from regulators instead.
However banks using the scheme expect lending to individuals and businesses to pick up over the rest of this year as economic conditions start to improve, the Bank of England said yesterday.
The government launched the Funding for Lending Scheme (FLS) in July 2012 as part of its efforts to lift the economy out of recession. Under the scheme, the central bank makes cheap funds available to banks and building societies on the condition they lend it on to UK households and businesses.
But despite 41 lenders accessing £17.6bn ($27.2bn), net lending — the difference between money lent and loans repaid — fell by £2.3bn in the year to the end of June 2013.
Britain’s biggest banks have cut back on lending and shed assets to meet tough rules on capital imposed by regulators, to prevent a repeat of the 2008 financial crisis. Banks have also pointed to a lack of demand from borrowers.
However, lending grew in the second quarter of 2013, the central bank said, an indication that the FLS is starting to have an impact as the economy shows signs of recovery and the appetite for borrowing improves.
Banks using the FLS scheme lent £1.6bn ($2.5bn) in the second quarter, but the improvement was not enough to make up for a decline of £3.9bn in the previous three quarters.
The Bank of England said net lending to individuals had picked up slightly in the second quarter but lending to businesses shrank.
“FLS participants collectively expect net lending volumes to pick up over the remainder of this year,” Paul Fisher, the central bank’s executive director for markets, said. The scheme runs until January 2015, the year of Britain’s next parliamentary election.
The biggest net lenders during the second quarter were Nationwide, Lloyds Banking Group, Virgin Money and Barclays, according to Bank of England data.
State-backed Royal Bank of Scotland and Spain’s Santander continued to significantly cut net lending, however. Santander cut lending by £10.4bn in the last year and RBS by £6.8bn.
RBS has shed £900m of assets to reduce risk and make the bank safer following a £45bn government bailout in 2008. Santander wants to lend more to businesses, which requires greater capital to be held, and is cutting back on mortgage lending to enable it to do so.
The British Bankers Association, a industry lobby group, said the scheme had helped to lower the cost of borrowing enabling business to benefit from some of the lowest rates in history. However, the Federation of Small Businesses said small firms were missing out on the cheap finance with many not even knowing about the scheme.
“Many small businesses have been affected by the lack of access to financial support during the financial recovery and have relied on non-bank lenders to keep them afloat,” it said.
Reuters
