UK lending shrinks in first month of Funding for Lending

Funding for Lending (FLS), launched on 13 July by the Bank of England (BoE) and HM Treasury, aims to inject money into the economy by granting banks access to funds at below market interest rates.

Participating banks can gain £1 of low rate funding (typically 0.25%) from the £80bn scheme for each £1 lent to UK households and businesses until the end of 2013. But if the banks' loan stock contracts during this time by more than 5% the price of funds will be increased to 1.25%.

On 24 September, BoE published a list of 13 banks who had signed up to the scheme, inlcuding RBS Group, Santander, and new bank Virgin Money.

In July, during which the scheme begun, funding fell by £300m.

According to BoE figures published on 1 October, funding in July fell by £300m, a 2.2% shrinkage on July 2011. The £2.2bn drop in August represented an even bigger decline of 3.1% year-on-year.

A spokesperson for BoE said: "Early indications suggest the FLS is having an impact, but it is unrealistic to expect to see that in lending figures for August."

A spokesperson for HM Treasury said: "It is early to days to use data from August as a benchmark for whether the scheme is having an impact.

"We would be expecting the scheme to filtering through in the coming months."

Jamie Nelson of Compass Business Finance said: "I have seen no difference yet as a result of FLS, it's certainly not had any initial impact.

"But it is unlikely that the FLS will have had time to have any impact on the lending figures yet, the earliest you would expect this to have any impact is the end of 2012.

"People are looking to invest but only when they are sure it is right. It's still a tough market out there and banks are still playing a cautious hand.

"The transaction and the asset needs to be right to get the funding."

BoE said that it had expected UK bank lending to decline over the subsequent 18 months following the launch of FLS due to banks adjusting their business models in the wake of the financial crisis. It hoped that FLS would act as an incentive to reduce cuts in bank lending that it would otherwise expect if the scheme were not in place.

BoE head of financial markets Paul Fisher added: "It will probably take some time for banks to review fully their lending plans and it is likely that drawings from the FLS will be spread out over the full window to the end of 2013.

"Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions. If the cost of funds is reduced, the supply of credit expands and hence the quantity of lending should rise."

Nelson added that the summer was traditionally a "quiet period" regarding loans in the print sector. He added: "It will be interesting to see what, if any the effect is in the last quarter of 2012, and through the whole of 2013."

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