by Mark Johnston
Is the Funding for Lending Scheme Working?
The Bank of England and HM Treasury launched the Funding for Lending Scheme (FLS) in July and is designed to boost lending to households and businesses alike.
The scheme works by allowing banks and building societies to borrow from the Bank of England for up to 4 years. As security against that lending, banks will provide assets, such as business or mortgage loans, to the Bank of England. Banks will be able to borrow during the 18 months from 1 August 2012 until 31 January 2014.
However he did also add that “The Funding for Lending Scheme will not address any of the underlying problems in the euro area or in the financial sector. I believe the scheme provides all the right incentives to increase the supply of credit.”
Under the terms of the scheme, the 13 banks that signed up to the scheme can borrow cheap funds from the Bank, equal to 5 per cent of their total outstanding loans, they qualify for about £60 billion of cheap funding.
The Royal Bank of Scotland, Lloyds Banking Group and Santander UK have all already made £1 billion of loans available on the back of the scheme and the benefits are expected to start coming through over the next few months.
Of Britain’s six largest banks, only HSBC has declined to sign up to the Bank of England run scheme as it said it did not require the additional support.
However, according to the boss of the banking arm of Tesco “many high street lenders are failing to pass on the full benefits to their customers of the Funding for Lending Scheme (FLS).
Some commentators are saying that the full benefits of the Funding for Lending scheme are not being passed on to customers and that some banks are using it to make a bigger profit margin.
The figures, from the bank of England showed that the average fixed mortgage rate rose by 0.03 percentage points in August and is now 0.52 percentage points higher than at the start of the year.
Michael Saunders, UK economist at Citi, said: “The data suggest that the introduction of the Funding for Lending Scheme has not produced significant immediate results in improving the growth or price of credit to households and businesses.”
“The Bank of England data indicates that consumers appetite for new taking on new borrowing is limited while there is also an ongoing strong desire of many consumers to reduce their debt,” Howard Archer, IHS Global Insight UK economist, said.
In its latest lending report published yesterday, the Bank of England said it was “too early” to assess the impact of the scheme on actual loan volumes.
In conclusion most experts agree with the bank ofEnglandand say it is still potentially a tad too early to really examine the schemes effectiveness.
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