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Banks reduce loans, in spite of Funding for Lending Banks reduce loans, in spite of Funding for Lending
(about 1 hour later)
The number of loans being offered by banks has continued to fall in spite of the Funding for Lending Scheme (FLS).The number of loans being offered by banks has continued to fall in spite of the Funding for Lending Scheme (FLS).
The scheme, which began in August last year, was designed to encourage banks to lend more money, both to individuals and businesses. The scheme, which began in August last year, was designed to encourage banks to lend more money, both to individuals and businesses, and boost the economy.
But the Bank of England has announced that net lending fell by more than £2.4bn in the final quarter of last year. But the Bank of England has announced that net lending fell by £2.4bn in the final quarter of last year compared with the previous three months.
However, UK banks have taken up nearly £14bn since the scheme started.However, UK banks have taken up nearly £14bn since the scheme started.
Lloyds was amongst the banks that lent less, while Barclays lent more.Lloyds was amongst the banks that lent less, while Barclays lent more.
"Some banks are reducing parts of their lending activities, consistent with the continued adjustment of their business models in the wake of the financial crisis, or responding to state aid conditions," said the Bank. "Some banks are reducing parts of their lending activities, consistent with the continued adjustment of their business models in the wake of the financial crisis, or responding to state aid conditions," said the Bank of England.
But the Bank said that Funding for Lending should encourage banks to cut their lending by less than they otherwise would have done. It said the scheme had been slow to take off because banks had to scrutinise and approve loan applications.
"FLS should encourage those banks that were planning to reduce their lending to households and companies in aggregate to expand their core lending such that the total is cut back by less than would otherwise have been the case," it said. "It takes 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 said.
In total, £80bn is being made available to banks at reduced interest rates, but only if they guarantee to lend that money on to Britain's small and medium-sized businesses, as well as individuals. And it claimed that banks were already lending more than they otherwise would have done, had the scheme not been in existence.
But the British Chambers of Commerce said the news was disappointing.
In total, at least £70bn is being made available to banks at reduced interest rates, but only if they guarantee to lend that money on to the UK's small and medium-sized businesses, as well as individuals.
'Slamming on the brakes'
The data from the Bank of England shows strong variations between different banks.
Lloyds, which is 40%-owned by the taxpayer, cut back its lending by more than £3bn during the last quarter of 2012. Santander, reduced its lending by slightly less, £2.8bn.
But Barclays increased the number of loans it made by £1.8bn.
Nationwide, which has a big mortgage book, increased its lending by £1.7bn.
Chris Love, of the mortgage broker Mortgage Simplicity, said some of the banks were still trying to increase their reserves, rather than lend more money out.
"The data has been skewed somewhat by the activities of a few of the larger banks slamming on the lending brakes to bolster their capital bases."
Lack of demand
New figures from the banks themselves confirm that lending to businesses is continuing to fall.
The British Bankers Association (BBA), which represents all the main banks, said lending to four million small and medium-sized businesses fell by £382m in the last quarter of 2012.
But it insisted that most loans that are asked for are approved.
The BBA said small and medium-sized businesses were sitting on large cash reserves and choosing to pay down their debts, rather than borrow more. In other words, fewer businesses wanted to borrow money.
"It is more of a demand issue, rather than a supply issue," a spokesman told the BBC.
And it claims that business owners are being put off applying for loans.
"Every time that people read that banks aren't lending, they don't apply."
Homebuyers benefitingHomebuyers benefiting
In recent weeks, there have been some signs that Funding for Lending was feeding though into the mortgage market, thus helping to cut the price of home loans.In recent weeks, there have been some signs that Funding for Lending was feeding though into the mortgage market, thus helping to cut the price of home loans.
Previous figures from the Bank have suggested that average rates have fallen to 3.65%, as a direct result of Funding for Lending.Previous figures from the Bank have suggested that average rates have fallen to 3.65%, as a direct result of Funding for Lending.
Several lenders have cut rates.
But lending to businesses has shown little sign of revival, with the industry saying it will take longer for FLS to feed through into business loans.But lending to businesses has shown little sign of revival, with the industry saying it will take longer for FLS to feed through into business loans.
Last week, the Bank's deputy governor, Paul Tucker, admitted that the majority of loans funded by FLS had gone to homebuyers rather than small and medium-sized businesses.Last week, the Bank's deputy governor, Paul Tucker, admitted that the majority of loans funded by FLS had gone to homebuyers rather than small and medium-sized businesses.
Speaking to MPs on the Treasury Select Committee, he hinted that the Bank was considering "extraordinary" policies to encourage more business lending, including the idea of charging High Street banks a negative interest rate.Speaking to MPs on the Treasury Select Committee, he hinted that the Bank was considering "extraordinary" policies to encourage more business lending, including the idea of charging High Street banks a negative interest rate.
This would encourage banks to lend cash to small firms, rather than deposit it with the Bank of England, which would cost them money. This would encourage banks to lend cash to small firms, rather than pay to deposit it with the Bank of England.
Shops hard-hitShops hard-hit
It is also being claimed that the retail sector has been unduly hit by a failure to grant business loans.It is also being claimed that the retail sector has been unduly hit by a failure to grant business loans.
Accountancy firm Wilkins Kennedy LLP said banks had cut the amount they lent to retailers by 5.7% in the year to the end of December 2012.Accountancy firm Wilkins Kennedy LLP said banks had cut the amount they lent to retailers by 5.7% in the year to the end of December 2012.
Over the last three years, it said loans to High Street shops had fallen by more than 18%.Over the last three years, it said loans to High Street shops had fallen by more than 18%.
Recent casualties in the High Street have included Comet, Jessops, Blockbuster and Republic.Recent casualties in the High Street have included Comet, Jessops, Blockbuster and Republic.
"The recent retail sector insolvencies will have added to the view amongst banks that they are still over-exposed to this struggling sector," said Anthony Cork from the firm."The recent retail sector insolvencies will have added to the view amongst banks that they are still over-exposed to this struggling sector," said Anthony Cork from the firm.
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