The Bank of England recently announced that the Funding for lending Scheme (FLS), which was set up last year, has been revised so that it will no longer benefit the household lending.
The first phase of the FLS, which ends on 31 January 2014, is unaffected by this announcement There are two new measures that will be put in place as part of this revised scheme. First the Prudential Regulation Authority (PRA) has decided that it will end temporary capital relief on new household lending in January 2014. Secondly the Bank of England and HM Treasury will refocus the FLS on business lending, from the start of next year.
Since the launch of the FLS in April 2012 it has contributed to a fall in bank funding costs resulting in significant improvements in household credit conditions. Credit conditions for smaller businesses have also improved, and lending to businesses overall remains muted. The FLS extension will therefore provide continued support for lending to businesses in 2014, with incentives in the scheme targeted towards lending to small and medium-sized businesses.
George Osborne also backs this up by commenting to the BBC that small businesses are the lifeblood of the economy.
The FLS extension will continue to allow participants to draw from the scheme from February 2014 until January 2015, but household lending in 2014 will no longer generate any additional borrowing allowances. Instead additional allowances will now only reflect lending to businesses in 2014. The initial borrowing allowances in the FLS extension already earned by household and business lending in 2013 will be unaffected. Lending to smaller businesses in 2014 will continue to be encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to SMEs. It is hoped that this change will help banks move away from mortgage lending and towards business lending; the alteration will also be a factor in slowing down the rise in house prices.
When the FLS was first established the CML were positive about the effects it would have on the economy, with Lenders commenting that the funding for lending scheme should help improve the availability of secured credit to households.
What will this mean in the long-run?
What effects will it have on our industry?