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Funding for lending won't solve SMEs' problems Funding for lending won't solve SMEs' problems
(5 months later)
When the Royal Bank of Scotland is under pressure to conserve its cash and shrink its lending, what, you might ask, is the point of officials inside the Bank of England extending and upgrading the funding for lending scheme (FLS) to encourage the small business loan market?When the Royal Bank of Scotland is under pressure to conserve its cash and shrink its lending, what, you might ask, is the point of officials inside the Bank of England extending and upgrading the funding for lending scheme (FLS) to encourage the small business loan market?
The Edinburgh-based bank can already lay claim to more than 40% of small and medium-sized business lending. With Lloyds, the other state-owned bank, it dominates the scene and, according to many business leaders, sets the benchmark for the industry. Loan criteria, charges and penalties are all set by RBS, they say.The Edinburgh-based bank can already lay claim to more than 40% of small and medium-sized business lending. With Lloyds, the other state-owned bank, it dominates the scene and, according to many business leaders, sets the benchmark for the industry. Loan criteria, charges and penalties are all set by RBS, they say.
RBS wants to make money and can only do so by lending, but it is under instruction from the Treasury and a welter of new banking rules to be risk averse. A risk averse strategy turns away pleas from risky SMEs in favour of safer borrowers – which in this case are big business and high loan-to-value homeowners.RBS wants to make money and can only do so by lending, but it is under instruction from the Treasury and a welter of new banking rules to be risk averse. A risk averse strategy turns away pleas from risky SMEs in favour of safer borrowers – which in this case are big business and high loan-to-value homeowners.
In recent months the mortgage market has woken from a four-year slumber, partly as a result of cheap FLS loans, and large businesses have also taken a big slice of the action, while SME borrowing has shrunk 3% year on year.In recent months the mortgage market has woken from a four-year slumber, partly as a result of cheap FLS loans, and large businesses have also taken a big slice of the action, while SME borrowing has shrunk 3% year on year.
Threadneedle Street is not making any great claims for the FLS or the revamped FLS II. It's an insurance policy that makes cheap funds available for practical, bog standard business lending come what may. Should another Cyprus hit the eurozone, sending borrowing costs through the roof, there will always be the FLS pumping out loans at rock bottom rates of interest, or at least until January 2015.Threadneedle Street is not making any great claims for the FLS or the revamped FLS II. It's an insurance policy that makes cheap funds available for practical, bog standard business lending come what may. Should another Cyprus hit the eurozone, sending borrowing costs through the roof, there will always be the FLS pumping out loans at rock bottom rates of interest, or at least until January 2015.
The FLS has cut 0.5 percentage points from the interest rates typically offered to SMEs compared with last summer when the scheme first began to operate.The FLS has cut 0.5 percentage points from the interest rates typically offered to SMEs compared with last summer when the scheme first began to operate.
That means, says the central bank, the falls in net lending across the economy in recent months would have been much higher without their scheme in place.That means, says the central bank, the falls in net lending across the economy in recent months would have been much higher without their scheme in place.
This downbeat assessment chimes with many businesses who want a more seismic shock to the banking system to get the wheels of the economy well and truly oiled.This downbeat assessment chimes with many businesses who want a more seismic shock to the banking system to get the wheels of the economy well and truly oiled.
John Longworth, boss of the British Chambers of Commerce, says George Osborne should extend backing to the embryonic Business Bank. He says this would "energise a new and crucial player in the lending market, and help to solve the long-term structural gap in finance that continues to strangle far too many growth businesses across the UK".John Longworth, boss of the British Chambers of Commerce, says George Osborne should extend backing to the embryonic Business Bank. He says this would "energise a new and crucial player in the lending market, and help to solve the long-term structural gap in finance that continues to strangle far too many growth businesses across the UK".
Osborne is relying on the Bank of England to drive growth with a package of monetary policies that feed into the economy via the banks, but while so many crucial banks remain hampered in their efforts to recover, he needs to go further. In many ways the Co-op's failure to buy 632 branches from Lloyds is a bigger indicator of his problems because without a more competitive and well-capitalised banking sector, the Bank of England's efforts could be wasted. The Co-op, ideally, was going to be the first of many banks to give the big five a jolt. With no banking competition and no business bank, fiddling with the supply of funds via the FLS is just that, fiddling. Without a more activist policy, the economy looks like going sideways for many more years than it needs to.Osborne is relying on the Bank of England to drive growth with a package of monetary policies that feed into the economy via the banks, but while so many crucial banks remain hampered in their efforts to recover, he needs to go further. In many ways the Co-op's failure to buy 632 branches from Lloyds is a bigger indicator of his problems because without a more competitive and well-capitalised banking sector, the Bank of England's efforts could be wasted. The Co-op, ideally, was going to be the first of many banks to give the big five a jolt. With no banking competition and no business bank, fiddling with the supply of funds via the FLS is just that, fiddling. Without a more activist policy, the economy looks like going sideways for many more years than it needs to.
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