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Is the Funding for Lending Scheme working?

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Introduced in the summer of 2012, the Bank of England’s Funding for Lending scheme was established as a means of boosting credit for businesses and households.

Under the scheme, any banks and building societies who increase lending to businesses or households will be able to borrow more funds from the scheme at a lower cost than those institutions who have scaled back on lending.

Banks and building societies participating in the scheme are able to borrow up to 5% of the value of their existing lending. There is no upper limit on borrowing under the scheme, and the cost to the bank/building society for borrowing under the FLS will be dependent on how much lending they do under a reference period set by the Bank of England.

Why was the FLS set up?

The FLS was put in place in order to incentivise banks and building societies to lend more within a financial climate which is still experiencing difficulties in recovering, particularly in the case of mortgages and loans for businesses.

Banks may offer the funds they borrow from the FLS in whatever ways they choose, such as offering lower rate loan-to-value products or reducing interest rates on existing products.

Is it working?

Despite the intentions behind the scheme, recent figures would appear to suggest that it is not having the desired effect. In reality it would seem that many UK banks and building societies have cut their levels of lending instead of passing on the value to businesses and consumers.

Cuts in lending have been witnessed across all the major UK high street banks and building societies, with Lloyds and RBS , both bailed out by the taxpayer during the financial crisis, cutting loans dramatically.

RBS have cut funding by £1.6 billion, despite having borrowed £750 million from the FLS, while Lloyds Banking Group, who have borrowed £3 billion from the FLS have cut funding by £983 million this quarter.

These figures have led to concerns that banks are simply using the scheme to shore up ailing reserves of capital. The banks who have cut their lending levels though have denied that this is the case, and insist that they have invested the money strategically in other areas and are still boosting lending.

Is the FLS boosting mortgages?

One key area which may be gaining some positive benefit from the scheme is mortgage lending. Mortgage providers are reporting an overall increase in lending across all levels of buyers, not just those with high value deposits.

The rise in mortgage lending is not however solely attributable to the FLS, other government backed schemes such as Help to Buy and NewBuy also contributing to the uplift in figures. The Council of Mortgage Lenders has reported that there has been an increase in mortgages to first time buyers over the past few months.

There has also been a marked increase in the number of remortgages which have been approved, with figures from April 2013 showing there have been 30,313 remortgages approved this year, which is higher than the previous six month average.

Future of the FLS

Despite the obvious boost the scheme has given to the mortgage market, it still does not address exactly why many of the major banks have cut their lending rather than increase it.

What is causing particular concern is the stall in lending to new small and medium businesses, which it seems are not benefiting from bank loans.

Lending to SMEs was one of the key targets of the FLS when it was established, and it was this area which it was hoped would benefit the most from the scheme. Banks are defending the limited lending to SMEs by saying that it isn’t lack of supply from them, but rather that there is a shortage of demand from businesses.

However the rise of peer-to-peer lending would seem to refute this claim by the banks. Peer-to-peer lending allows savers to lend money to businesses and individuals who may not have been able to borrow from the banks. Peer-to-peer lending more often than not offers better rates than the banks would, although there are of course obvious risks in terms of protection on the amounts borrowed.

Although peer-to-peer lending is still in its infancy and doesn’t lend anywhere near the figure to SMEs that the banks do, there is still room for growth. At present, there is approximately 250% growth per year within this market and it is still growing.

What next? 

The government clearly still has faith that the FLS will do the job it was intended for and has increased the scheme into 2015 and has also provided more incentives for banks to increase lending to SMEs.

It remains to be seen though whether SMEs will still approach banks for loans under the FLS, or whether they will continue to seek alternative avenues of finance, such as peer-to-peer lending networks.

The FLS has also raised more questions as to whether the UK needs a centralised state investment bank, specifically for the purpose of investing in businesses. It is argued that this is the only option which will create stable growth to businesses and create new employment opportunities in the process.

The Bank of England has stated that the FLS would take time to show positive lending and they anticipate that this will happen in the latter half of 2013.



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