More Funding, Less Lending
Funding for Lending, the Bank of England’s scheme to boost bank lending, has been operating now for nine months. The results? The Bank has now dispensed £16.5bn of cheap funding, but bank lending again contracted in the last quarter, this time by £300m.
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Previous schemes gave banks government guarantees on their borrowing provided they passed on the savings made to borrowers. These schemes failed because banks were unwilling to lower the interest rates they charged. Banks who receive money through F4L but fail to increase their lending are simply charged higher rates for the Bank's support – a smaller carrot rather than a stick.
So far, banks seem to have simply pocketed the money.
The Bank of England claims that this is as expected:
The picture of flat lending growth overall is broadly as expected at this stage reflecting reductions in some legacy portfolios [financialese for old loans] being roughly offset in aggregate by expanding new lending. The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013.
The Bank is careful to justify the scheme in terms of the increase in lending compared to what would have happened without it. But even if the scheme produces some improvement in lending conditions, its economic impact may be unwelcome. Despite the overall reduction in bank lending, mortgage lending has actually increased. This increase was offset by a steeper fall in lending to businesses. So Funding for Lending is helping to rebalance the economy; the problem is the rebalancing is away from productive enterprise towards another housing bubble.