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The FLS has contributed to a substantial fall in bank funding costs since its launch in mid-2012. That has fed through to improvements in credit conditions for households and businesses. Reflecting the significant improvements in household credit conditions, the incentives in the FLS were re-focussed towards business lending in November 2013. The extension will continue to provide support to where it is most needed, by focussing the incentives in the scheme towards lending to SMEs in 2015.
The FLS extension will complement various other longer-term initiatives to improve the availability of credit to SMEs as they take root. These include: the British Business Bank’s various programmes to make markets work better for SMEs; the joint Bank of England-ECB initiative to improve the functioning of the securitisation markets, including securitisation of SME loans; the Government’s proposals in the Small Business, Enterprise and Employment Bill to mandate greater sharing of SME credit information and to require banks to share details of SMEs which have been declined finance; the Bank of England’s consideration of widening access to credit data to support the provision of credit to SMEs through non-financial intermediary channels, such as trade credit; changes to the PRA’s regulatory approach to make it easier to set up new banks; and a reduction in capital requirements for SME lending under EU legislation.
Following the announcement, the drawdown window for the FLS extension will remain open until 29 January 2016. Current participants in the FLS extension will remain part of the scheme unless they choose to opt out, and they will retain borrowing allowances earned by lending from 2013 Q2 to 2014 Q4. Participants will be able to earn further allowances by lending to SMEs in 2015, with such lending strongly incentivised by allowing participants to draw £5 in the scheme for every £1 of net lending to SMEs. Net lending to financial leasing corporations and factoring corporations – which can be important sources of finance for some SMEs – will continue to count towards allowances generated in 2015, pound for pound. All other terms of the FLS extension remain unchanged, with drawings continuing to be for a term of four years and attracting a fee of 25 basis points.
Although the Bank is not indemnified for the operation of the FLS, the exchange of letters between the Governor of the Bank of England and the Chancellor of the Exchequer shows that the Bank has sought and received an assurance from the Government that the objectives of the extended FLS remain within the Bank’s remit. The scheme will continue to be overseen by a Joint Oversight Board comprised of Treasury and Bank officials.
Market Notice: Amendment to the Funding for Lending Scheme Extension
Letter from the Governor to the Chancellor
Letter from the Chancellor to the Governor