Funding for Lending Scheme falls short by £2.4 billion.

The Momentum UK Team 04 March 2013

The amount of loans being issued to customers has continued to fall despite the introduction of the Funding For Lending Scheme (FLS).

Initiated in August last year, the FLS is designed to encourage banks to relax their increasingly tight rules of lending to small to medium sized businesses as well as individuals.

However, despite the introduction of the scheme, The Bank of England revealed that during the final quarter of 2012, net lending fell by more than £2.4 billion.

The FLS is capable of issuing a total of £80 billion to lenders at reduced interest rates, and it is hoped that this will encourage greater lending. Funds from the FLS are available to banks under the condition that they lend money to Britain's small and medium sized businesses, as well as individuals.

Commenting upon the policy and the reduction in lending, The Bank of England said:

"Some banks are reducing parts of their lending activities, consistent with the continued adjustment of their business models in the wake of the financial crisis, or responding to state aid conditions.

"FLS should encourage those banks that were planning to reduce their lending to households and companies in aggregate to expand their core lending such that the total is cut back by less than would otherwise have been the case".

Despite the reduction in lending home buyers may have seen some benefit with money from the FLS partly credited with lower interest rates offered on some mortgages.

Lending to businesses however has seen little improvement. This is despite loans for small to medium sized businesses being a major feature of the FLS. However the Bank of England claims that it will take longer until the benefits of the FLS are felt by business owners.

High Street shops have fallen victim to more than an 18% reduction in loans in three years. Paul Tucker, the deputy governor for the Bank of England admitted that the majority of loans stimulated by the FLS had in fact gone to home buyers rather than businesses.

It has been recently suggested that the Bank of England could resort to further measures in an attempt to encourage lenders to lend more freely. These measures could include the creation of negative interest rates, which would result in high street banks being less inclined to deposit with the Bank Of England, and could potentially encourage lending.

Such measures are yet to be confirmed however.