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Funding for Lending starts to work

The Funding for Lending (FLS) scheme – introduced earlier this year by the Bank of England to offer cheaper funded money amounting to approximately £60bn to banks and building societies to enable them to lend-on to individuals and smaller businesses – is showing signs of starting to work.

Although in early December they reported that only £4.4bn of funds had been drawn on by only six lenders. Whilst emphasising that they did not expect to see the full picture until into the New Year, the Bank of England stated that early signs of take-up were good. In their quarterly bulletin they said: “FLS should lead to more and cheaper credit flowing into the real economy than otherwise.

“Early signs have been encouraging: market funding costs for UK banks have fallen sharply and many loan rates have fallen.

“But given the usual lags from credit being offered to loans being made, the FLS is unlikely to materially affect lending volumes until 2013.”

One negative aspect of this initiative is that savers rates have also declined, as the banks and building societies involved are under less pressure to raise funds from the wider market place.

Being just one of many initiatives introduced to try to boost the economy; FLS joins quantitative easing as another arrow in its reflationary quiver. Here they have injected £375bn of ‘new’ money into the banking system and they have held interest rates at an historical low of 0.5% for nearly four years.

Echoing the Bank’s comments, Mike Cherry, of the Federation of Small Businesses (FSB) was quoted as saying: “The cost of borrowing is beginning to slightly fall, so there is some sign that FLS is having an impact.

“There has been an increase in the number (of loans) that have been approved straight away.”

This is part of our monthly economic review is intended to provide background to recent developments in investment markets as well as to give an indication of how some key issues could impact in the future. It is not intended that individual investment decisions should be taken based on this information; we are always ready to discuss your individual requirements.

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