The first phase of the FLS, which ends on 31 January 2014, is unaffected by this announcement, but the extension will not provide further support to households.
Governor Mark Carney said: “Over the past year the Funding for Lending Scheme has contributed to the recovery by helping to significantly improve credit conditions, especially for households. The changes announced today refocus the FLS where it is most needed – to underpin the supply of credit to small businesses over the next year – without providing further broad support to household lending that is no longer needed.”
In a letter to George Osborne, the BoE Governor said: “Since its launch the FLS has contributed to a substantial fall in bank funding costs. This has fed through to significant improvements in household credit conditions. Credit conditions for smaller businesses have also improved, but to a lesser extent, and lending to businesses overall remains muted.
“In light of these developments, you and I have agreed that we should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary. Accordingly Bank and HM Treasury officials have been working together to finalise plans for two changes to the terms of the FLS extension. These changes have no implications for HM Government's Help to Buy scheme, which is designed to address the specific issue that access to mortgages for borrowers without large deposits remains difficult, rather than to provide broad support to household lending.
“The re-focusing of the FLS towards business lending builds on its success to date and supports the achievement of the Bank's financial stability objective. I would be grateful if you would confirm that you are content with the proposed changes, and that the scheme remains within the remit of the Bank.”
Two FLS extension changes:
- The first change: Proposal that 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.
- The second change: The fee for all drawings from the FLS extension will be set at 25 basis points, which is the lowest point of the previous fee scale. As announced in April, lending to smaller businesses in 2014 will be encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to SMEs. Taken together, these features provide certainty over the availability of cheap funding to support small business lending in 2014.
Commenting on these changes to the scheme, the Chancellor of the Exchequer said: “The Funding for Lending Scheme proved to be a successful tool in supporting the recovery. Now that the housing market is starting to pick up, it is right that we focus the scheme’s firepower on small businesses. Small firms are the lifeblood of our economy. That’s why we’re reforming the banks, introducing the employment allowance and now focussing the Funding for Lending Scheme to support them.”
Responding to Mark Carney’s letter, George Osborne said: “Reflecting the success of the FLS, these changes focus the incentives in the scheme towards supporting business lending in 2014, and SME lending in particular.
“Since the scheme was announced, the FLS has successfully contributed to driving down funding costs. This has fed through to significant improvements in household credit conditions. Although loan volumes remain below pre-crisis levels, there are signs that the UK housing market has started to normalise. Mortgage rates are at their lowest in five years and mortgage products for lower loan-to-value mortgages are widely available. This reflects, in part, the success that the FLS has had on household credit conditions, and we have agreed it is an appropriate time to begin withdrawing this broad support for household credit conditions.”
He went on to say: “However, while household credit conditions and the housing market are recovering, the market for higher loan-to-value mortgages remains very restricted by historical standards.”
Osborne said that the FLS changes will not affect the “vital function” of the Help to Buy scheme.
Osborne added: “Credit conditions for smaller businesses have also improved, but to a lesser extent, and lending to businesses overall remains muted. It is therefore very important that the scheme continues to support lending to businesses and provides strong incentives to SME lending in particular, in line with the extension to the scheme announced in April this year. In addition, setting the fee at 25 bps, the lowest point on the precious scale will further enhance the incentives for SME lending.”
The FLS scheme was launched jointly by the Bank of England and HM Treasury in July 2012, with the scheme modified this year in April and extended into 2014.
Leave a comment