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.

UK funding for business is now on course

In a two-pronged initiative the coalition government has announced the creation of a new ‘British Business Bank’; an entity that will initially be funded with £1bn of taxpayers’ money and, hopefully, a larger private sector contribution in due course.

The brief for this Business Bank will be to offer funding to small and medium-sized businesses and “get behind” good firms who are currently struggling to
receive financing from the high street banks.

It is hoped that the Business Bank will operate via the existing lenders and start
disbursing funds within 18 months. It has not been made clear, however, exactly where the state funding will come from and we will have to wait until the Chancellor’s autumn statement on December 5th for the details.

Any disbursements will be in the form of equity stakes or guarantees; therefore, they will sit on the balance sheet of the recipient businesses and not be reclaimed by the government. Vince Cable, the business secretary, stated that
there is, however, a chance they could generate a return for the taxpayer in the long run.

The second string to this initiative is the previously announced Funding for Lending scheme (FLS), which is also designed to make cheaper loans available to businesses and individual entrepreneurs.

In an announcement in late September, five of the largest banks in the UK have agreed to participate in this scheme, which means that thirteen banks and building societies have now signed up. Together they will represent 73% of the
lending market, worth approximately £1.2 trillion. Only HSBC has declined to take part, as it states that it does not require the additional funding.

The participating banks and building societies will be able to borrow 5% of their loan books straight away and increase this percentage if certain criteria are met.

They will be charged a minimal 0.25% interest on these funds, provided that they increase their overall lending as a result. Should they decrease their lending, then they will be charged 1.5% by the by the Bank of England.

The UK taxpayer and the Bank of England will be covered against any possible losses, as the borrowing banks and institutions will have to lodge collateral with the Bank of a higher value than the loans offered.

Given their current lending figures, this could result in an additional £60bn being made available from the Bank of England for them to lend on to businesses at more competitive rates. news on inflation front SME’s get funding window

The Bank of England’s executive director for markets, Paul Fisher, commenting on this announcement said a: “significant number” of additional building societies and banks were considering joining the scheme. He went on to add: “I am confident that the FLS will help the supply of credit.

Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months.”