Today’s publication shows for each group participating in the FLS the amount borrowed from the Bank and the net quarterly flows of lending to UK households and businesses eligible under the Scheme up to the second quarter of 2013.
In the quarter ending 30 June 2013, 18 participants made FLS drawdowns of £2.0bn, while one participant repaid £0.9bn. This took the total amount of outstanding drawings under the Scheme to £17.6bn, with 28 groups now benefitting from funding under the Scheme. Net lending by FLS participants over the quarter was £1.6bn, slightly stronger than in previous quarters, although net lending overall since the Scheme began remains broadly flat. One additional group joined the Scheme in 2013 Q2, taking the total number of participating groups to 41. The inclusion of that group has resulted in downward revisions to the data for total net lending by FLS participants in previous quarters.
The FLS creates incentives for banks and building societies to boost their lending to the UK real economy by reducing their funding costs, which in turn allows them to reduce the price of new loans. Market funding costs have fallen significantly since the announcement of the FLS and this has reduced the incentive to draw on FLS funding for some participants. FLS funding remains a backstop source of funding for all participants should market conditions deteriorate.
Following the falls in funding costs, interest rates on mortgages and personal loans have fallen significantly since the start of the FLS, as shown in Chart 1, with continued decreases in recent months. There is also evidence that the price and availability of lending to businesses has improved since the Scheme began and this trend has continued in recent months. A range of evidence suggests that credit availability has increased and the cost of credit has decreased for larger businesses. The picture for the conditions faced by small and medium-sized businesses is more mixed, but survey evidence from the Federation of Small Businesses suggests that the pricing of loans for small businesses was more favourable in 2013 Q2 than in mid-2012.
The aim of the FLS is to encourage more lending to the UK economy than would have been the case in the absence of the Scheme. In aggregate, net lending was broadly flat in Q2, continuing the trend seen since the Scheme was launched. That is likely to reflect several factors, including the typical lags between improvements in credit supply and higher lending volumes, as well as subdued credit demand. Prior to the launch of the FLS in July 2012, Bank staff judged that UK bank lending was more likely to decline than increase over the subsequent 18 months. Looking ahead, net lending is projected to pick up modestly over the second half of the year. Further discussion of the outlook for lending is available in the Inflation Report.
The data published today show that in 2013 Q2, lending by FLS participants (£1.6bn) was slightly stronger than the aggregate net lending figure published for Q2 (-£2.1bn), in large part because net lending by non-FLS participants was negative in Q2. The data also reveal differences in net lending volumes across FLS participants. As in previous quarters, some large groups’ net lending has been constrained by the desire to reduce their so-called ‘non-core’ loan portfolios, in order to repair balance sheets and, for some, to comply with State Aid conditions. These constraints are likely to ease for some of these banks in future.
There have also been differences in lending across different sectors of the economy. Aggregate net lending to individuals has been positive recently and picked up slightly in 2013 Q2. And mortgage approvals for house purchase – which tend to lead net mortgage lending by a few months – edged higher in Q2, suggesting that lending to individuals is likely to increase further.
Aggregate net lending to businesses remained negative in 2013 Q2. Within the total, lending to large companies was weak. But this is likely to partly reflect the continued use of alternative forms of finance by larger companies, who are better able to access capital markets. Net corporate bond issuance in the first half of 2013 was robust.
Net lending to small and medium-sized enterprises (SMEs) was also negative in 2013 Q2, but the growth rate was less negative than for large companies. Going forward, SME credit conditions should be supported by the extension to the FLS announced in April, which provides additional incentives for participants to increase lending to SMEs both this year and in 2014. A large proportion of FLS participants have indicated their intention to participate in the extended Scheme.
The extension to the Scheme also gave FLS participants the option to include lending involving certain non-bank providers of credit to households and businesses within their lending figures for the last three quarters of 2013. Two groups have chosen to activate this option – these are denoted by an asterisk in the usage and lending data table.
Brian Murphy, head of lending at Mortgage Advice Bureau (MAB), comments:
“The success of the Funding for Lending Scheme’s (FLS) has been clearly demonstrated by banks and building societies boosting lending and reducing costs, with benefits of cheaper funding rife in the mortgage market. Since the start of the scheme average fixed-rate mortgages have fallen by at least one percentage point across two, three and five year deals, while total product numbers have soared to over 10,000 for the first time in five years.
Yet as mortgages rise in number and fall in price, it’s been borrowers with sizeable deposits who have reaped the greatest rewards. In the past twelve months the typical purchase loan to value (LTV) has actually fallen slightly for homebuyers, stifling improvements in market access for those with smaller savings pots.
As FLS enters the third quarter of 2013, we hope to see lenders extend the benefits of falling funding costs to higher risk sectors, combatting the risk of rising house prices locking out a larger proportion of potential buyers.”
Paul Hunt, managing director of Phoebus Software said:
“The Funding for Lending scheme has underpinned the housing market over the past year and has provided strong foundations for growth. Gross mortgage lending has improved across the spectrum and figures confirm the housing market is stable. Mortgage lenders’ progressive attitude has helped boost the market as their willingness to lend through the provision of innovative products is helping first time buyers.
In particular banks have used the Funding for Lending scheme to allow more competitive mortgage rates and by providing higher loan to value mortgages which has resulted in a significant jump in first time buyers loans recently. The revival in first time buyer numbers demonstrates not only the underlying buyer demand, but that lenders have pushed the market forward to unlock this demand. Further relief for banks and building societies has been found in the scheme, as it has provided lenders with the means to drive growth in mortgage lending.”
Commenting on today’s data, Paul Fisher, Executive Director for Markets at the Bank of England, said:
“The FLS is continuing to support lending to the UK economy with a range of indicators suggesting that credit conditions are steadily improving for households and firms, and FLS participants collectively expect net lending volumes to pick up over the remainder of this year.”
Adam Tyler, chief executive of the National Association of Commercial Finance Brokers (NACFB), commented:
“SME’s are being left in the lurch by high street banks. There is a critical shortfall in lending to small businesses, which is stifling the economic recovery and making a mockery of the government’s pro-business rhetoric. Lenders have abused the Funding for Lending scheme, and used it primarily to increase mortgage lending when the whole point of the scheme was to provide funds to credit-starved businesses.
Mortgage lending has recovered to its pre-financial levels, but lending to businesses is still 22% below its 2008 peak and is falling. If Britain wants to build a sustainable economic recovery that is based on innovation, production and enterprise – rather than unsustainable house price growth, an overreliance on financial services, and household debt – then it needs to start lending more to businesses. Failure to improve the flow of credit will put the recovery at risk.”
Craig Donaldson, CEO, Metro Bank says:
"Overall today's Funding for Lending figures are once again disappointing for the industry. Despite a net lending increase in the quarter, overall lending since June 2012 remains flat, demonstrating a lack of commitment from many of the scheme's participants to use FLS to boost lending to individuals and SMEs
"However, there does appear to be some light at the end of the tunnel, with several of the banks showing big increases this quarter - ourselves included. We're extremely proud of our lending growth in the last year. Metro Bank is committed to supporting lending for individuals and SMEs and we hope this is a message to customers that there is lending out there, if you look to the right banks. We hope that over the next quarter we see more banks do more."
