Banks and building societies are still not lending more, despite the launch of the Funding for Lending Scheme (FLS) last year.
A report released today by the Bank of England shows that net lending by institutions participating in the FLS declined by GBP2.4bn in the final quarter of the year. Total net lending by the same institutions is down by GBP1.5bn since 30 June 2012.
In fact, a majority of banks and building societies did increase lending in the fourth quarter but their efforts were more than offset by lower lending in the quarter by Royal Bank of Scotland, Lloyds Banking Group and Santander, The Telegraph reported.
Moreover, the Bank believes that lending would have fallen faster without the FLS and there is evidence that the scheme is helping to lower the cost of mortgages.
The Funding for Lending Scheme was launched in August by the Bank of England and the Treasury as part of efforts to expand lending to businesses and households and stimulate economic growth. It works by reducing funding costs for banks and building societies, which allows them to reduce the price of new loans and increase their net lending.
A total of 39 banks and building societies have now signed up to the FLS. In the fourth quarter of 2012 participants of drew down GBP9.5bn, taking the total amount drawn under the scheme to GBP13.8bn.
The Bank pointed out that the fourth quarter is typically a weak quarter for lending and said that the data shows a continuation of the trend of broadly flat lending growth.
It argued that funding costs have fallen significantly since the announcement of the FLS and there are indications of an improvement in credit conditions, with loan rates falling. However, it takes time for reduced funding costs to feed through to lending volumes.
Overall, net lending rose in January and credit conditions are expected to improve over the course of the year.
Although the Bank of England stressed that it will take time for the FLS to feed through, there was criticism from the British Chambers of Commerce (BCC). Its director of policy and external affairs, Dr Adam Marshall, maintained that the real test for the scheme has always been whether the funding reaches fast-growing and new firms. “Unfortunately the latest Bank of England Credit Conditions Survey confirmed that small firms continue to be left out in the cold,” he said.
Dr Marshall called for the planned Business Bank to be established as soon as possible in order to assist young companies looking to expand and drive the country’s economic recovery.