Funding for Lending leaves small businesses on hard rations

Bank of England says patience is called for with Funding for Lending, with no pick-up yet for lending to SMEs

There were plenty of sceptics when the Bank of England launched its Funding for Lending scheme (FLS) a year ago. The doubters said it would not be the catalyst for investment to small and medium-sized companies and would not cut the Gordian knot that has seen bank lending to businesses fall quarter after quarter. And, on the evidence of the past 12 months, the sceptics were right.

Threadneedle Street got quite sniffy when it was suggested that the FLS would be a bung to the high street banks benefiting only Britain's vociferous and overblown housing lobby? Not at all, the Old Lady demurred. This was a scheme that would help metal bashers as well as mortgage payers.

When the initial data showed that there was no pick-up in SME lending, the Bank said patience was called for. Lending to the housing market would rise first, it said, with business lending responding with a lag.

Well, the wait goes on. As predicted the cheap funds the commercial banks have been able to obtain from the Bank of England have boosted the housing market while lending to SMEs continues to languish. The FLS, now supported by George Osborne's Help to Buy subsidies, is well on its way to generating Britain's next housing market bubble, while SMEs remain on hard rations. So much for rebalancing the economy. So much for breaking the UK's dependency on debt.

Here's what Richard Sexton, director of e.surv chartered surveyors, has to say about the scheme: "Funding for Lending has given the mortgage market some real get up and go. And that's in stark comparison to its impact on SME lending, which is still bumping along the bottom. Compared to last year, house purchase lending is 23% higher. It's true that the funding source has allowed banks to slash interest rates, and savers have been punished. But there has been a real payoff.

"Loans to high LTV [loan-to-value] borrowers are now at a four-and-a-half-year high. More first-time buyers than ever are able to access house purchase loans. Rates have dropped and banks are more willing to lend to first-time buyers in the knowledge they have a cushion of cheap credit to fall back on should some of those loans go pear-shaped."

Well, quite. Apart from the flatlining business lending, the punishment meted out to savers, the fact that first-time buyers are taking on more debt than may be advisable, and the security the Bank of England is providing to lenders for duff loans that go pear-shaped, what's not to like?

Not a lot, clearly, if you are a government desperate to generate a feelgood factor between now and the election in 2015. Nothing at all if you are a surveyor or a mortgage broker happy to see a steady stream of first-time buyers come through the door.

But quite a lot if you think that house prices are already way too high, that far too much of Britain's fixed investment goes into bricks and mortar, and that the UK's dismal economic history of the past four decades can be summed up by the inevitability of housing bust following housing boom.

Sexton says, perfectly accurately, that FLS has been like a "course of steroids" for the mortgage market. That, sadly, is precisely the problem with it. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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