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Funding for Lending, is it working?

By Richard Halstead on Dec 3, 12 05:18 PM in Economics

The Bank of England released the first round of data today on the Funding for Lending Scheme (FLS). The scheme was launched by the Governor and the Chancellor earlier this year with the aim of improving the net flow of credit to UK households and private non-financial companies.

Overall, the data released today for 2012q3 indicates a very modest positive flow of net credit to households and business

Unfortunately the FLS data does not distinguish between lending to households versus lending to companies but it is unlikely that this new lending was driven by businesses. The Bank of Englands Trends in Lending shows that net loans raised business reduced in q3 2012 suggesting banks have instead been focusing on increasing household and mortgage lending.

So while today's data shows FLS is having some impact on overall lending, this initial picture confirms our view that it is not the full answer to the UKs financial challenges.
The SME finance challenge remains - UK lenders need to reengage with SMEs and support them with their investment plans in challenging economic times.

EEF's Finance for Growth report outlines the need for the UK to establish a more dynamic lending environment for SMEs both within the banking sector and beyond it. The report outlines our recommendations for improving competition in the SME banking sector.

Recommendation 1:

To encourage lower costs, better T&Cs, and a higher standard of service, EEF urges the government to conduct a focused three month review on ways of bringing more private competition to bear in UK SME banking such as introducing an explicit switching incentive or creating a standard data portal for new challengers to assess potential new customers.

Recommendation 2:

In addition the government should use its new 'business bank' to create a retail challenger at scale to take the main incumbents dominating the SME banking landscape.

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