In the quarter ending 30 September 2012, net lending by FLS participants was +£0.5bn, less than previously hoped, and total FLS drawdowns from the Bank were £4.4bn. There are now 35 groups participating in the Scheme, which cover just over 80% of the stock of lending to the real economy.
Each FLS participant is able to borrow an amount up to 5% of its stock of loans to the UK non-financial sector as at 30 June 2012, plus any expansion of its lending from that date to the end of 2013.
The FLS works by reducing funding costs for banks and building societies, which allows them to reduce the price of new loans and increase their net lending. Banks and building societies will need to expand their lending to maximize their benefits from the Scheme.
Funding costs have fallen since the announcement of the FLS, but it will take time for reduced funding costs to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process. The Bank have said that it is therefore too early to use these data as a reliable indication of the impact of the FLS on lending volumes.
Paul Fisher, Executive Director for Markets at the Bank of England, said:
"I am confident that the FLS will help the supply of credit. The incentives in the scheme are for banks and building societies to cut lending rates and hence lend more to get the cheapest funding. Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions. But it is too early to use these data as a reliable indication of the impact of the FLS on lending volumes."
Christopher Shaw, CEO of the alternative finance provider Platform Black, commented:
"The choice of name has proved to be unintentionally ironic. The funding is there all right, but there's precious little lending going on.What launched as the Bank of England's Great White Hope risks looking like a white elephant. The scheme has reduced the banks' funding costs, but on this early evidence it has done little to encourage them to lend. Net lending increased by just £0.5 billion in the quarter in which the scheme launched - a fraction of the amount hoped for. Interest rates on mortgage loans have fallen, but the Bank's figures show that the average rate charged on new corporate loans actually rose in October.
"Total lending to business continues to fall. Clearly the Funding for Lending Scheme has done nothing to support business yet. Despite their greater access to funds, the high street banks' risk aversion has become endemic, and most won't consider lending to a firm without significant assets and security. In many cases, even when companies are offered a loan, the terms can be so prohibitive that they are just not practical. The effect is to stop many start-ups in their tracks and stunt the wider economy's recovery. Our own research shows that 81% of businesses struggled to keep on top of cashflow in the past year, with 84% rating the banks’ reluctance to offer credit as a barrier to success.
"Increasing numbers of businesses are either choosing to grow organically or are exploring alternative sources of finance like invoice trading. The Funding for Lending scheme is a fine idea in principle - but for now it is little more than that. The banks' continued unwillingness - or inability - to lend to businesses has led ever more companies to seek funds from alternative finance providers. The banks still have a vital role to play oiling the wheels of British business, but their monopoly on lending is gone for good."
Darren Sharma, CEO of Frontline Analysts, commented:
"There is a deep tension at the heart of the government’s policy mix, where banks have to be less leveraged and at the same time lend more. The Funding for Lending Scheme is an elegant idea, and may even have worked to a degree, though Lloyds, RBS and Santander actually shrank their loan books during Q3. The Bank of England suggests that more time is needed because applications and approvals for borrowers take time – well, they don’t take that much time these days.
"The Bank also feels that any lack of lending from the scheme is due to lack of competition in banks. Even if true that can’t be solved quickly, so they will need to look at other weapons in their armoury. The Funding for Lending Scheme is a considerable improvement on Project Merlin, which was flop, but it remains fundamentally limited in what it can achieve. Carrying out funding for lending does not preclude other methods of getting funds to businesses and households. Vince Cable’s state bank idea has the potential to play a role in policy, as does telling banks that we own what to do.
"My own view is that co-operative lending models could also be encouraged: these were the basis for small business borrowing in the Victorian era. Direct government pressure is perfectly possible to apply without ruining banks’ business models. The core constraint is an ideological one but we need to move beyond this if things are to change."
Angel Mas, President at Mortgage Insurance Europe at Genworth, said:
“It is positive to see the number of participants in the FLS continuing to grow and in quarter three this year net lending by those involved was +£0.5bn. The Bank is right to make the point that funding costs have fallen and lenders are cutting rates accordingly, however we would question whether first-time buyers in particular and those needing high loan-to-value mortgages are seeing the benefits.
"Currently FLS appears to have heightened competition for those needing 60% LTV products but we would like to see more focus on the needs of those with small deposits. At the moment first-timers are finding it incredibly difficult to save the deposits needed to access mortgage finance and we would like to see lenders utilising the range of options available to them in order to help more people on to the ladder.
"Many other countries, such as Canada, have not seen the huge drop-off in 90/95% LTV mortgage products we have witnessed in the UK because lenders there have to take out mortgage insurance for 80%-plus LTV loans which mitigates some of the risks associated with such lending. There is a vibrant mortgage insurance market in the UK supported by many leading global reinsurers that can help drive the high LTV market. With wider usage of mortgage insurance, this would mean the FLS could help many more first-time borrowers who we would all agree are the lifeblood of our mortgage market.”
