Bank lending continues to slide – as do savings rates

28th August 2014


Lending to UK businesses contracted further during the second quarter of 2014, the Bank of England (BoE) has confirmed, despite its attempt to stimulate lending via the Funding for Lending Scheme.

The BoE and HM Treasury launched the Funding for Lending Scheme (FLS) on 13 July 2012 in a bid to incentivise banks and building societies to boost their lending to the UK real economy, by providing funding for an extended period, with both the price and quantity of funding provided linked to their lending performance.

But overall lending by FLS participants shrank by £3.9bn in the three months to the end of June, of which £3.5bn was accounted for by large corporates and £0.4bn by SMEs. Aggregate drawings on the scheme by banks now stand at £45.7bn, of which Lloyds and Nationwide are the largest participants, making up £14bn and £8.5bn respectively.

Commenting on the lending stats, John Longworth, director general of the British Chambers of Commerce, said: “Although the decline in lending to SMEs was less than in the previous quarter, Funding for Lending continues to disappoint. Despite the welcome re-focus towards SME lending, the real test for the scheme has always been whether it is able to get credit flowing to young and fast-growing businesses. Unfortunately many of these firms remain frozen out when it comes to accessing the finance they need to fulfil their potential. The Business Banking Insight (BBI) confirms that many SMEs are unhappy with the level of service they receive from their bank.

“These figures reiterate that much more needs to be done to fill major gap in the provision of SME finance in the UK, including increasing the role of equity and bond markets and delivering a Business Bank with a greater capital base than under current plans and the ability to lend directly to businesses.”

Notably since the scheme was introduced, cash rates for savers have plummeted, as banks have used the FLS instead of trying to attract deposits. In some cases rates have fallen by as much as 60% since the scheme’s inception.

Laith Khalaf, a senior analyst  at fund broker Hargreaves Lansdown said cash ISAs and bonus accounts have been hit particularly hard – they have roughly halved – though there are a number of factors at play in these rates besides the Funding for Lending Scheme, including market competition and new regulatory liquidity standards for banks.

He added: “The jury is still out on the FLS and today’s figures don’t increase the chances of a positive verdict. The BoE will maintain that the scheme will take some time to have full effect, and we don’t know what business lending would be shrinking by if the scheme were not in place. Lending demand may also be part of the problem. Perhaps so, but meantime savers are bearing the brunt of the pain in their deposit accounts and cash ISAs.’

Deposit rates:

31st July 2012 31st July 2014 % Change
Instant access including bonus 1.55% 0.62% -60.00%
Instant access excluding bonus 0.48% 0.42% -12.50%
Cash ISA including bonus 2.57% 1.18% -54.09%
Cash ISA excluding bonus 1.41% 0.86% -39.01%

Source: Bank of England

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