(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Jan 4 (Reuters Breakingviews) - UK banks are having a happy new year. Fourth quarter data suggests that domestic lenders are making much more credit available, which in turn implies that the Bank of England’s Funding for Lending Scheme
(FLS) is working. But the figures don’t prove this latest attempt to kick-start the moribund domestic lending scene will be a game changer.
The FLS allows banks to access funding at a cost of around 1 percent if they grow or maintain the size of their loan books. The BoE hasn’t disclosed how much banks made use of it in the last three months, but the lenders themselves certainly say it is helping. After getting steadily worse in the first three quarters of 2012, the price and availability of credit to households and larger companies improved sharply in the fourth quarter.
Yet the stock of outstanding UK loans is not going up, according to BoE data released on Jan. 4. Net secured lending to individuals declined by 200 million pounds in November, while net lending to UK businesses dropped by 2.8 billion pounds. Even if households and companies are securing cheaper credit, they look to be mostly using the funds to pay back more expensive existing debt or to build up cash reserves. The most credit-starved companies, those with a turnover less than 1 million pounds, are not finding credit cheaper or easier to obtain.
That doesn’t make the FLS a waste of time, even if the cheap funds are not pushing up lending much either directly or immediately. The indirect effects could be significant. Lower funding costs should bring a higher profit, providing a capital boost which should allow more lending. And in theory, the availability of cheap credit will improve confidence among potential as well as actual borrowers.
But a virtuous growth circle will not start until households and companies decide that prospects in the domestic economy are promising enough to merit investment. If the FLS does not provide the necessary boost in confidence, it will be up to the UK government to find other ways to stimulate the stagnant economy.
- The availability of mortgage finance to UK households rose significantly in the three months to mid-December, the Bank of England’s Credit Conditions Survey showed on Jan. 3. Credit availability to UK businesses with revenue exceeding 1 million pounds also rose strongly, although less so for smaller businesses.
- The BoE’s Funding for Lending scheme, which allows UK banks to borrow cheaply, was widely cited by lenders as contributing to the increase in credit availability.
- Lenders reported an increase in credit demand for mortgages and corporate loans during the fourth quarter, but a reduction in demand from companies with turnover of less than 1 million pounds.
- Spreads on mortgages and lending to large and medium-sized firms narrowed significantly in the fourth quarter, but remained broadly unchanged for small businesses.
- The British Bankers’ Association said net mortgage lending grew by only 200 million pounds in November, while net lending to non-financial businesses fell by 3.1 billion pounds. Deposits grew by 3 billion pounds.
- The Bank of England’s Trends in Lending data, published on Jan. 4, showed that net lending to UK businesses of all sizes fell by 2.8 billion pounds in November, while secured lending to individuals fell by 200 million pounds. However, the effective interest rate on new lending to UK businesses fell from 2.92 percent in October to 2.64 percent in November.
- Bank of England Credit Conditions Survey, Jan. 3: link.reuters.com/vap94t
- Bank of England Trends in Lending data, Jan. 4: link.reuters.com/wap94t
- British Bankers’ Association November data: link.reuters.com/xap94t
- Reuters: British banks set to lend more helped by BoE scheme [ID:nL5E9C33HI] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Edward Hadas and David Evans)
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