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Loan cuts despite funding costs falling “significantly”.
The Bank of England has published updated data on the use of the Funding for Lending Scheme (FLS). The data shows that for each group participating in the FLS the amount borrowed from the Bank and the net quarterly flows of lending to UK households and businesses for the first quarter of 2013.
In the quarter ending 31 March 2013, 13 participants made FLS drawdowns of £2.6bn, taking the total amount drawn under the Scheme to £16.5bn. Net lending by FLS participants over the quarter was -£0.3bn. There are now 40 groups participating in the Scheme, which cover over 80% of the stock of lending to the real economy.
The FLS aims to encourage more lending to the UK economy than would have been the case in the absence of the Scheme. It creates incentives for banks and building societies to boost their lending by reducing their funding costs, which allows them to reduce the price of new loans and therefore increase net lending. Further information on the transmission mechanism of the FLS and developments at each stage are available in the Inflation Report.
Funding costs have fallen significantly since the announcement of the FLS, and remain at low levels. There is evidence that rates have fallen on mortgages, unsecured personal loans, and loans to businesses of all sizes.
The trend of flat lending growth is present in both the aggregate net lending data already published (which includes lending by non-FLS participants), and for FLS participants in the data published today. It will take time for the improvement in credit conditions experienced since the launch of the FLS to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process. Prior to the launch of the FLS in July 2012, Bank staff judged that UK bank lending was more likely to decline than increase over the subsequent 18 months. Net lending is expected to pick up and become modestly positive over the remainder of the year.
The data published today also reveal differences in net lending volumes across participants in the Scheme. Twenty seven out of forty participating groups increased their lending in 2013 Q1. Together, these groups lent a net £5.1bn to the UK real economy, while the thirteen groups that contracted their net lending did so by a combined £5.4bn. Of that contraction, £4.9bn was accounted for by three large groups. In part, that reflects a desire by several major UK lenders to reduce the scale of their so-called ‘non-core’ loan portfolios following the financial crisis, or a need to comply with State Aid conditions. But the rate of that contraction slowed in 2013 Q1.
