MortgagesJun 3 2013

Lending squeeze continues despite Bank scheme billions

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Lending across the economy by UK banks has continued to contract despite the sector continuing to draw billions from the Bank of England’s Funding for Lending scheme, new data reveal.

According to data published by the Bank of England, the rate of contraction in lending by UK banks has slowed over the three months to March 2013 to £300m, compared to the £1.5bn squeeze witnessed over the final three months of 2012.

This is in spite of participants drawing a further £2.6bn under the FLS, which incentivises banks to boost their lending by reducing the cost of borrowing from the central bank, bringing the total amount drawn under the scheme to £16.5bn.

The Bank claims there will be a delay in improvements to credit conditions since the scheme’s launch and that net lending is expected to swing around into modest growth later in 2013.

The majority of participants increased their lending, with 27 out of 40 participating companies lending a total of £5.1bn in the first quarter of 2013.

However, the 13 remaining companies together contracted their lending by a combined £5.4bn. Of that contraction £4.9bn was accounted for by three large groups, the Bank said.

Paul Fisher, executive director for markets at the BoE, said: “The picture of flat lending growth overall is broadly as expected at this stage reflecting reductions in some legacy portfolios being roughly offest in aggregate by expanding new lending.

“The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013.”

Stewart Baird of SME venture funding company Stone Ventures, said: “From a business lending perspective, the FLS has been an absolute failure. We certainly don’t need to be told that net lending to business has largely been negative. Every business in the UK can feel it.”

Stephen Smith, director of housing and external affairs at Legal and General Network, said: “Undeniably the FLS has had a positive impact on the supply of mortgage finance since its introduction in the summer of 2012. We have seen it support what were tentative signs of market recovery at that time and it has continued to underpin the relative resurgence we have seen more recently.

“Perhaps most importantly FLS has helped to restore confidence to both borrowers and lenders and confidence is a key commodity in any market. However, FLS is ultimately a short-term measure and it is important that this is seen as the stimulus it is rather than a panacea.”