Funding for Lending Scheme extended

In a continuing effort to boost growth in the UK economy, the Bank of England’s (BoE) Monetary Policy Committee saw “merit” in extending their

Funding for Lending Scheme (FLS) for another year, out to 2015, as an alternative to expansion of its Quantitative Easing (QE) programme. This action was mooted by George Osborne, the Chancellor of the Exchequer, in his March budget speech.

Launched last August, and initially expected to finish in December 2014, the FLS has come into criticism, as it has so far failed to improve bank lending. Designed to encourage banks to lend – particularly to small to medium-sized enterprises (SMEs) - the banks were offered an extra £5 for every £1 they lent to these businesses. Now they will be able to borrow £10 in 2014 for every £1 they lend to SMEs in 2013.

In fact, the BoE’s own figures show that banks drew down £14bn from the FLS between August and December 2012, but surprisingly, lending from those banks to SMEs was lower than in the six months before the scheme was introduced.

This latest extension of the scheme will also see specialist finance houses embraced into the facility. At present these type of organisations offer over £20bn of working capital to SMEs each year. With interest rates, set by the BoE, at the historically low level of 0.5% for four years now, it is hoped that bank lending will improve in the short term.

The champions of UK business, the Confederation of British Industry’s (CBI) Director for Competitive Markets, Matthew Fell, said of this announcement: “Funding for Lending is only one piece of the finance jigsaw. Boosting firms’ confidence by raising awareness of the various funding schemes available is critical.”

However, Stephen Gifford, the Director of Economics at the CBI said: “With only a modest pick-up in growth expected, the possibility of further QE will remain a live issue.”

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Funding for Lending starts to work

The Funding for Lending (FLS) scheme - introduced earlier this year by the Bank of England to offer cheaper funded money amounting to approximately £60bn to banks and building societies to enable them to lend-on to individuals and smaller businesses – is showing signs of starting to work.

Although in early December they reported that only £4.4bn of funds had been drawn on by only six lenders. Whilst emphasising that they did not expect to see the full picture until into the New Year, the Bank of England stated that early signs of take-up were good. In their quarterly bulletin they said: “FLS should lead to more and cheaper credit flowing into the real economy than otherwise.

“Early signs have been encouraging: market funding costs for UK banks have fallen sharply and many loan rates have fallen.

“But given the usual lags from credit being offered to loans being made, the FLS is unlikely to materially affect lending volumes until 2013.”

One negative aspect of this initiative is that savers rates have also declined, as the banks and building societies involved are under less pressure to raise funds from the wider market place.

Being just one of many initiatives introduced to try to boost the economy; FLS joins quantitative easing as another arrow in its reflationary quiver. Here they have injected £375bn of ‘new’ money into the banking system and they have held interest rates at an historical low of 0.5% for nearly four years.

Echoing the Bank’s comments, Mike Cherry, of the Federation of Small Businesses (FSB) was quoted as saying: “The cost of borrowing is beginning to slightly fall, so there is some sign that FLS is having an impact.

“There has been an increase in the number (of loans) that have been approved straight away.”

This is part of our monthly economic review is intended to provide background to recent developments in investment markets as well as to give an indication of how some key issues could impact in the future. It is not intended that individual investment decisions should be taken based on this information; we are always ready to discuss your individual requirements.