Banks may use the new Funding for Lending (FFL) scheme to make profit rather than extend lower lending rates to borrowers, the Bank of England (BoE) has admitted.
In its inflation report for August, the BoE said the impact of the £80bn Funding for Lending scheme - which enables banks to access funds at below market level interest rates subject to them expanding their own lending levels - would be difficult to quantify.
The report says: "The timing and extent of pass-through to lending rates is uncertain. For example, it is possible that some banks raising funding through the scheme will take the opportunity to boost profits and capital rather than lowering lending rates."Earlier this week the Government confirmed it is to phase out its flagship National Loans Guarantee Scheme (NLGS) - a credit-easing initiative intended to pass on the benefit of the government’s low borrowing rate to UK business - in favour of the FFL.
Technoprint Leeds director Mark Snee said he anticipated that the banks would take the opportunity to boost their profits rather than pass on lower lending rates.
"I think it’s highly likely that the banks will use this cheap new money to repair their balance sheets, rebuild their capital ratios and increase their profits. Why wouldn’t they? The economic outlook is still deteriorating both in the UK and around the world. I personally don’t think we have seen the worst of it yet," he said.
Elsewhere, Nicholas Mockett, partner at Moorgate Capital, called for the Government and the BoE to explore new methods of financing businesses.
He said: "When I looked at the NLGS, the problem with it was that all the assets of the business owners had already been exhausted as security, which turned off a lot of potential borrowers. To ensure the FFL does reach businesses - and not simply bolster the banks - would, I suspect, require a massive amount of monitoring, which is tricky when the Government needs to take costs out of the civil service.
"My argument has been that the government should use National Savings & Investments to handle SME financing or set up a new organisation. If the government isn’t willing to do that, then they need to identify what will probably be smaller or newer banks which can be more dynamic and responsive, and which don’t have all the baggage and headline grabbing failings."
Under the new FFL scheme, which officially launched in July, for every £1 of lending made by participating banks and building societies to UK households and businesses banks will be eligible to access £1 of low rate funding from the scheme. But if lending levels are reduced banks borrowing from the FFL will be forced to pay higher fees to use the scheme.
From 1 August, for a period of 18 months, banks can take loans for up to four years from the FFL, which is funded by UK Treasury bills. Each bank can borrow up to 5% of its stock of existing loans to the UK non-financial sector. The price of borrowing will depend on its lending levels with those maintaining or expanding lending over the next 18 months paying 0.25% per year on the loan.
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