Bank: Funding plan might not bolster lending

 
Tim Wallace
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NOT ALL banks in the Funding for Lending Scheme (FLS) will increase lending, a top Bank of England official conceded yesterday, arguing instead that lending may simply fall by a smaller amount thanks to the cheap funds being offered.

The government is offering an initial £60bn to the 13 participating banks, with the aim of overcoming funding problems caused by the Eurozone crisis.

“The scheme is designed so that every firm has the potential to use it to support lending,” said Paul Fisher.

“But what this means is that we cannot expect every bank in the FLS to increase its stock of lending to the real economy over the 18-month period. It is to be expected that some firms still show an overall reduction, even if the FLS is successful.”

The poor state of the Eurozone economies and the ongoing restructuring of banks following the financial crisis are pushing down lending, with the FLS aimed at alleviating some pressures on funding costs.

Participation in the scheme has been higher than analysts had feared, with four of the five largest banks taking part as well as a range of smaller institutions.

The total stock of lending of the 13 institutions taking part came in at £1.21 trillion at the end of June.

They will be offered five per cent of their lending stock in cheap loans – a total of £60bn – and more if they increase their lending beyond that level. However, if they cut lending the interest rate will increase, providing an incentive to lend more.

Analysts agreed with Fisher that overall lending might not rise over the 18-month course of the programme.

“We expect a number of lenders, notably the partially state-owned banks, are likely to see static or shrinking lending,” said Barclays’ Chris Crowe. “While we expect to see lenders pass on lower funding costs, these effects are likely to be fairly small because the additional funding covers only a relatively small portion of banks’ balance sheets, and we do not think banks will substantially relax lending standards to promote new lending.”

THE STATE IS OFFERING AN INITIAL £60BN FOR BANKS TO LEND ON

Participating banks’ outstanding loans as at 30 June 2012

Lloyds Banking Group
£443.26bn

RBS Group
£214.8bn

Santander
£189.3bn

Barclays
£181bn

Nationwide Building Society
£152.2bn

Virgin Money
£15.1bn

-Leeds Building Society
£7.57bn

Principality Building Society
£5.4bn

Aldermore
£1.56bn

Monmouthshire Building Society
£629m

Ipswich Building Society
£444m

Hinckley & Rugby
£433m

Kleinwort Benson
£11m

TOTAL: £1.2 trillion