September 25, 2012 7:15 pm

Funding for lending scheme falls short

The Bank of England’s funding for lending scheme has signed up 13 banks to borrow cheap funds totalling £60bn, falling short of the widely touted £80bn goal unveiled late last spring.

Paul Fisher, executive director for markets at the BoE, warned that even though the programme was helping banks to cut their own borrowing costs – and pass the savings on to households and businesses – there could be no guarantees that more and cheaper credit would be readily available.

Moreover, he warned, banks were likely to borrow more from the scheme than they were likely to extend in new loans.

“I expect banks’ use of the scheme to exceed their lending growth,” Mr Fisher said in remarks prepared for a speech at Richmond University.

However, he said the programme had been unveiled when disruptions in the eurozone were causing interbank lending to contract, forcing lenders to pay even more for credit and to pass those rising costs to customers.

And while it was impossible to tell what would have happened without the scheme, Mr Fisher expressed confidence that its incentives would prod banks in the right direction.

He stressed he expected borrowing to expand. However, bank lending faced structural restraints, in particular, the lack of competition on the high street.

“The six biggest lenders account for the vast majority of lending to UK businesses and households, and the seventh largest accounts for less than a third as much as number six,” he said.

The scheme allows banks to borrow up to 5 per cent of the outstanding loan stock extended to UK households and businesses – currently totalling £1.66tn – at 0.25 per cent, as long as that bank’s stock of lending does not contract over the period to the end of 2013.

So far, the 13 banks that have signed up have aggregate borrowings of £1.21tn. If a bank’s lending contracts by 5 per cent or more, the cost of funds will rise to a maximum of 1.5 per cent.

Those banks that lend the most will have access to the cheapest funding, which ought to encourage more lending, Mr Fisher said.

BoE data show that Lloyds Banking Group – the largest UK domestic lender – is able to borrow £22bn in low cost funds. Two of its closest competitors, Barclays and RBS Group, have also signed up, as have Nationwide Building Society and several smaller lenders including the Hinckley & Rugby Building Society. HSBC has said it will not participate in the scheme.

Mr Fisher’s remarks come as the British Bankers’ Association, the industry body, unveiled its lending figures for August, the first month that funding for lending would have been effective. Its data showed that net mortgage lending – new loans minus repayments of principal – had contracted £0.3bn.

Mortgage approvals rose to 30,533 in August from 28,750 in July, and are slightly above the average of the previous six months. Lending to private, non-financial companies contracted, slipping £1.5bn in August. The decline was broadly in line with that seen over the previous six months.

Consumer credit also fell back by £0.3bn as repayments of credit card debt outstripped new borrowings.

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