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This extension builds on the success of the FLS so far, and has three main objectives: to give banks and building societies confidence that funding for lending to the UK real economy will be available on reasonable terms until January 2015; to increase the incentive for banks to lend to small and medium-sized enterprises (SMEs) both this year and next; and to include lending involving certain non-bank providers of credit, which play an important role in providing finance to the real economy.
Since its introduction in August last year, the FLS has contributed to a sharp reduction in funding costs for banks and building societies. That has led to a reduction in borrowing costs and an increase in credit availability for UK businesses and households. This is feeding through to more lending than there would have been in the absence of the scheme. But the improvement in credit conditions since summer 2012 has been less marked for small and medium-sized enterprises (SMEs) than for larger businesses and households.
Three specific changes to the FLS are being announced today:
The fee structure and operation of the scheme will be unchanged during the extension period, other than as outlined above. There will continue to be no upper limit on, or target size for, either individual or aggregate borrowing under the FLS. The extent to which banks and building societies choose to borrow more from the FLS will depend in part on their alternative funding costs, which have fallen sharply since the FLS was introduced. But the changes announced today provide banks and building societies with the assurance that they will be able to continue to fund lending to the real economy at reasonable cost, even if funding pressures rise again.
Commenting on the extension of the scheme, the Governor of the Bank of England said: "The FLS has contributed to a sharp fall in bank funding costs and an improvement in credit conditions since the middle of last year. The changes announced today build on that success by broadening the scope of the scheme and ensuring that it will continue to support the supply of credit, especially to small companies, into 2015. I believe such an extension is valuable as it gives banks continued assurance against the risk that market funding rates increase. Today’s announcement is, however, a complement to, not a substitute for, ensuring that our banks are adequately capitalised."
The Chancellor of the Exchequer said: “This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”
Commenting on today's announcement that the Bank of England will extend the Funding for Lending Scheme until 2015, Sharon Bowes MEP said:
"The extension of the Funding for Lending Scheme is welcome, but 2015 is not a long time horizon. I am sure that lower interest rates are welcome, no matter for how long, and this helps in the struggle for survival. However, if businesses are to plan for expansion, especially in the manufacturing sector, longer loans are needed. That kind of expansion cannot be planned on 'hire and fire'. Two years is not long enough for spreading capital repayment, business needs at least five years to establish confidence.
"Just like it being a good thing that UK sovereign debt is not on short term roll-overs, compared with some of our EU neighbours, the same applies for business. This is no time for being faint-hearted; now let us have the growth plan on top of the survival plan."
Press release © Sharon Bowles