Three big UK banks cut back on lending three months up till March 2013

Doubts over Funding for Lending as three banks cut loans

Fresh questions will be raised about the Bank of England’s Funding for Lending scheme tomorrow when official figures are expected to show that three leading banks cut credit to the economy despite using taxpayer subsidies.
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Philiip Aldrick By Philip Aldrick10:00PM BST 01 Jun 2013CommentsComment

Royal Bank of Scotland, Lloyds Banking Group, and Santander are expected to have drawn on the state-subsidised cheap credit scheme for a small amount more than the £4.75bn they have already taken, but to have reduced lending in the three months to March.

The scheme has been considered a success by reducing the mortgage rates paid by first-time buyers but has so far failed to trigger an increase in net lending – particularly to small businesses.

This week’s FLS figures are unlikely to silence critics, following Bank figures on Friday that showed net business lending dropped nearly £3bn in April, after a £545m contraction in March. Lending to smaller businesses shrank by £660m after a £115m fall in March, again the biggest drop since December.

The FLS has since been extended for a year and overhauled to incentivise banks to lend to small businesses.
Lending in the FLS’s first five months, to December, fell almost £2bn – even though the scheme was tapped by 13 banks and building societies for £13.8bn of cheap funding. Economists expect Monday’s figures to show another, smaller, fall in net lending.

However, the results so far have been distorted by big credit withdrawals by RBS, Lloyds and Santander as the three banks shrink parts of their balance sheets. The Bank has argued that lending would have fallen further were it not for the FLS, which it insists has been successful in boosting the availability of affordable credit to the economy.
Stephen Pegge, the director of small business lending at Lloyds, agreed that the headline figures were misleading. He said Lloyds had lent £18bn to small businesses, large corporations and households under its FLS deals, which offer a 1pc discount on the borrowing rate.

It has only drawn £3bn from the scheme, but market funding rates have come down so far that Lloyds has not needed to access it.

“We have very adequate liquidity, but the FLS is an important contingent source of funding,” he said.

Since the scheme was launched, he said Lloyds has lent a net £3bn to small companies on its FLS discount deal and about £1bn to first-time buyers. He claimed the reduction in Lloyds lending was due to a shrinking of its non-core balance sheet, as demanded by regulators.

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