Has Funding for Lending been a success?

Ben Chu

Both the Treasury and the Bank of England are claiming today that their “Funding for Lending” scheme (FLS) has been a success.

As a reminder, this programme was launched in the summer of 2012 and was designed to encourage banks to lend to small firms and households by offering them cheap state-backed funding.

Here’s a Treasury spokesperson:

“The Funding for Lending Scheme has played a crucial role in underpinning the recovery.”

And here’s Paul Fisher of the Bank of England:

“The FLS has been successful in meeting its initial objective, to provide incentives to banks and building societies to boost their lending to the UK real economy”.

Job done then?

I think this is rather rosy reading of the data.

The headline figures released by the Bank today show that bank’s drew down £42bn over the 18 months of the scheme and increased their net lending by £10bn. This translates into a 0.7 per cent increase in their stock of loans held in the summer of 2012.

That £10bn increase in net lending is equivalent to around 0.6 per cent of 2013 GDP – so pretty modest in the scheme of things; certainly relative to the rate of credit growth before the financial crisis when lending was rising at an average annual rate of around 10 per cent:

credit growth Has Funding for Lending been a success?

The Bank says that things would have been worse without the FLS, that banks would have actually contracted net lending. Well, maybe. It’s impossible to prove it one way or another.

But I think the fact that usage of the scheme has, apparently, undershot official expectations slightly weakens that argument. Participating banks were allowed to draw down 5 per cent of the loan stocks in cheap loans over the 18 months. That translated into a potential £70bn. In the event, as we have seen, the sector only drew down 60 per cent of that amount. That usage doesn’t suggest the FLS was such a vital shield for the banks in volatile credit markets.

There’s another important point. The Bank today, for the first time, provided a breakdown of how much banks lent to households under the FLS last year and how much to businesses, including small firms.

And this shows that while households were big beneficiaries, lending to small firms (SMEs in the jargon) actually fell by £1.3bn:

FLS NEW NEW Has Funding for Lending been a success?

This is data only for Q2 2013 to Q4 2013, but the story would almost certainly be the same if the preceding three quarters were shown too, as this separate monthly data from the Bank on the flow of SME loans indicates:

FLS3 Has Funding for Lending been a success?

This disappointing lack of impact is, of course, the reason why the second phase of the FLS has been “refocused” on SME lending by the Treasury and the Bank.

Are there any other mitigating factors when evaluating the impact of the FLS?

The Bank’s data shows that two banks – Nationwide and the Royal Bank of Scotland – were responsible for the big drags on net lending to SMEs last year.

FLSNEW2 Has Funding for Lending been a success?

I’ve been told that one should really discount the drag from these two lenders because they were getting out of the property loan development business as part of their necessary internal restructuring. In other words, they were hobbled by bad lending from the boom years and were never going to contribute much to net SME lending as a result.

Yet I’m not sure this is a particularly strong defence. It merely underlines the criticism made (including by me) that trying to increase the flow of lending to small firms by offering funding incentives to existing large banks – some of which were clearly intent on reducing their exposure to the sector – was flogging a dead horse.

I argued then that more radical measures – such as the former Monetary Policy Committee member Adam Posen’s idea of creating a state-backed and dedicated small business lending bank with funding support from the Bank of England – should be sought. And I think that verdict has stood up pretty well.

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