Three years after it was introduced, is it now time to end the Funding for Lending Scheme?

Last year the BoE withdrew incentives to provide mortgage lending (Source: Getty)

Philip Booth, a professor at St Mary’s University, Twickenham, and editorial and programme director at the Institute of Economic Affairs, says Yes.

The Funding for Lending Scheme (FLS) should never have been started. Initially, it could have been justified on the ground that the market was desperate for credit. But what has been its effect? There has been a substantial decrease in interest rates available to savers, who have suffered hugely as a result.

One-year interest rates fell from nearly 3 per cent to below 2 per cent at the outset of the scheme, and have never recovered. Indeed, George Osborne decided that he needed to introduce “pensioner bonds”, paying special high rates of interest, such was the fall in market interest rates. One government intervention begets another.

There is also little evidence that the scheme has benefited businesses. Bank lending is constrained by increased capital requirements and other regulation. Schemes like FLS cannot undo the damage that other forms of government intervention have caused.

Philip Shaw, chief economist at Investec, says No.

The Funding for Lending Scheme (FLS) has been invaluable in unshackling the housing market over the past three years, and a significant contributor towards achieving what we consider to be a sustainable recovery in the wider economy.

Indeed, banks’ drawdowns from the scheme totalled £57bn at the end of March this year. That said, we would caution against closing the scheme now. The housing market has a certain degree of momentum – such that the Bank of England has felt it necessary to impose restrictions in individual areas of the mortgage market. But it should be noted that the Bank amended the terms of the FLS late last year, withdrawing incentives to provide mortgage lending.

Hence the scheme is now a tool to channel funds to companies. And although their health has improved, banks are not yet functioning normally, so it remains important to encourage the provision of financing for businesses – SMEs in particular.

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