Lending rises as Bank of England scheme takes effect

Bank of England

Net lending to UK households and businesses increased after the launch of the Funding for Lending Scheme (FLS) in the summer, the Bank of England announced today.

Overall, net lending by the 35 banks and building societies participating in the FLS increased by GBP0.5bn in the quarter ended 30 September 2012 and institutions drew down GBP4.4bn under the scheme.

The FLS was introduced by the Bank of England and HM Treasury on 1 August. It works by reducing funding costs for banks and building societies, thereby allowing them to lower the price of new loans and lend more.

The central bank noted that it will take time for reduced funding costs to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process. This means that it is too early to use the first quarterly figures as a reliable indication of the impact of the scheme on lending volumes.

Nevertheless, Paul Fisher, executive director for Markets at the Bank of England, has said he is confident that the FLS will help the supply of credit.

Matthew Fell, director for Competitive Markets at business organisation the CBI, commented that the scheme appears to have started to make a positive difference to both the cost and availability of finance.

“The sense on the ground is that the scheme has made more inroads in the housing market, so now we need to see a big push so that it makes a difference in the business lending market,” he added.

This sentiment was echoed by Lee Hopley, chief economist at EEF, the manufacturers’ organisation, who said that the higher net lending shown by today’s figures is likely to have been driven by increases in credit to households, rather than businesses. UK lenders need to re-engage with small and medium-size firms and support them with their investment plans in challenging economic times, she added.

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