UK lending scheme fails to bridge funding gap

A UK Government-backed scheme to spur banks into increased lending has so far failed to bear fruit, suggesting the funding gap shows little sign of closing in the near future unless other sources of debt can be brought to bear. 

The UK Government’s ‘Funding for Lending’ scheme (FLS) has so far failed to provide a kickstart to the country’s provision of debt financing, according to official figures released on Monday. The scheme helps lenders (specifically banks and building societies) reduce the price of new loans and increase their net lending to individuals and corporates.

Just 11 lenders made use of the scheme in the fourth quarter of 2012, drawing down £9.5 billion (€11 billion; $14.4 billion) however.

Although there are now 39 participants in the scheme – which account for 80 percent of lending to the ‘real economy’, according to the Bank of England – only 14 have so far made use of it based on BofE figures. These include Barclays, Nationwide Building Society, Santander Lloyds Banking Group, and RBS. The latter two banks are state-owned.

In Q4 last year, net lending by FLS participants fell by £2.4 billion. Since the scheme launched in June last year, net lending is down by £1.5 billion.

“Funding costs have fallen significantly since the announcement of the FLS and there are indications of an improvement in credit conditions, with loan rates falling,” the Bank of England said in a statement. “But it will take time for this to feed through to lending volumes.”

Paul Fisher, executive director for markets at the Bank of England, said in a speech given to Bristol University alumni in London last week: “The FLS has clearly shifted the supply of credit: loans are generally available at lower cost than previously.  Even though lending rates have fallen, it is still quite early for much extra money to have flowed from the application stage into actual loans, compared with previous plans which showed that lending was most likely to fall in aggregate without the FLS. I would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest.”