U.K. banks are having a happy new year. Fourth-quarter data suggests that domestic lenders are making much more credit available, which in turn implies that the Bank of England's Funding for Lending Scheme (FLS) is working. But the figures don't prove this latest attempt to kick-start the moribund domestic lending scene will be a game changer.
The FLS allows banks to access funding at a cost of around 1 per cent if they increase or maintain the size of their loan books. The BoE hasn't disclosed how much banks made use of it in the last three months, but the lenders themselves certainly say it is helping. After getting steadily worse in the first three quarters of 2012, the price and availability of credit to households and larger companies improved sharply in the fourth quarter.
Yet the stock of outstanding U.K. loans is not going up, according to BoE data released on Jan. 4. Net secured lending to individuals declined by £200-million ($316-million) in November, while net lending to U.K. businesses dropped by £2.8-billion. Even if households and companies are securing cheaper credit, they look to be mostly using the funds to pay back more expensive existing debt or to build up cash reserves. The most credit-starved companies, those with a turnover less than £1-million, are not finding credit cheaper or easier to obtain.
That doesn't make the FLS a waste of time, even if the cheap funds are not pushing up lending much either directly or immediately. The indirect effects could be significant. Lower funding costs should bring a higher profit, providing a capital boost which should allow more lending. And in theory, the availability of cheap credit will improve confidence among potential as well as actual borrowers.
But a virtuous growth circle will not start until households and companies decide that prospects in the domestic economy are promising enough to merit investment. If the FLS does not provide the necessary boost in confidence, it will be up to the U.K. government to find other ways to stimulate the stagnant economy.