FLS unlikely to impact business loans until mid 2013

According to the report, which includes a section on the impact of FLS thus far, it was too early for the scheme to affect net lending in Q3, when it emerged that net lending acroos the six banks that had drawn funds under the scheme had actually fallen by £1bn.

However, the BoE cited sharp falls in UK banks' long-term funding costs and falls in some quoted mortgage rates and reports of a reduction in loan rates to smaller businesses in November's Agents' summary of business conditions as evidence that FLS is beginning to have an impact.

"The scheme appears to have contributed to lower bank funding costs [and] there are early indications that it has begun to flow through into credit conditions, including falling loan rates," today's quarterly report claimed.

It added that while there was "less concrete evidence of an easing in corporate conditions" some lenders had reported reductions in the cost of credit to companies "particularly smaller ones" in the form of reductions in interest rates and fees and the introduction of cash-back schemes on certain products.

Yet, while the Bank argued that the FLS could materially affect mortgage lending volumes in early 2013, it did not expect the impact on business lending to be as quick "because many corporate loans are tailored to the customer, and so are less standardised than mortgage loans".

Meanwhile, the Bank also outlined the mechanism through which rates are charged to banks that draw funds from the FLS, which is designed to encourage lending by making it more expensive to borrow for banks that reduce lending.

Banks that maintain or expand their lending over the 18 months from June 2012 to December 2013 will only pay 0.25% on their FLS borrowings, whereas banks that contract their stock of loans by less than 5% will pay an additional 0.25% for each single percentage point fall in net lending.

Banks that contract their stock of loans by more than 5% pay the maximum 1.5% interest per annum, 50 basis points (0.5%) than the current 12 month LIBOR figure (1.01% at 17 December 2012).