Big Banks cut Lending while taking the Funding-for-Lending Cash
Bank lending dropped by £2.7bn in the last quarter of 2012 according to recent data from the Bank of England. This is despite the government's efforts to extend cheap money to the banks via the Funding for Lending Scheme (FLS). Alarmingly, Lloyds, Santander and RBS/Nat West all reined in business and mortgage loans.
Lloyds for example has taken £3bn from FLS since last summer but has reduced the value of its loan book by some £5.6bn. Meanwhile, RBS/Nat West has reduced its loan book by £2.3bn since the lending scheme began. And Santander has cut its loans by £6.3bn despite having taken £1bn from FLS.
The big five high street banks account for 90% of lending in the UK, and with three of them cutting funding on such a scale, hopes for economic growth led by the private sector will be dented.
Interestingly, the big 3 cutters contrast starkly with building societies such as Nationwide (lending up by £3bn after taking £2bn through FLS) and our own Coventry Building Society (lending up nearly £1bn after taking just £100m from FLS). They also contrast with Barclays which upped lending by £6bn on the back of £5.7bn of FLS money (HSBC hasn't participated in the scheme).
Full figures on the FLS can be seen here
What is especially worrying is that the two state-owned banks (Lloyds and RBS/Nat West) cut lending so much. Analysts will no doubt argue that it's a demand side issue (that can't be so if Barclays and many building societies are increasing lending) or that the hard-up banks are under pressure to strengthen their financial positions.
But such trends yet again raise questions over the government's whole approach. After the failure of Project Merlin and credit easing, FLS was meant to get money out of banks into small firms. Yet recent figures showed net lending to businesses falling by £4.5bn in the last quarter of 2012 (the last quarter is a weak period for lending to firms but even so this is a poor result).
Actually there is very little evidence that FLS is doing very much to help small firms. What it may be doing is getting money into the mortgage market so may eventually have a role in driving up house prices. This isn't how FLS was 'sold' by the government as a way of driving business lending and economic recovery.
In that sense, FLS fits the recent pattern of government interventions very well - it's yet another half-baked effort to fix the problem of zombie banks. And since FLS we've also had the announcement of yet another attempted fix in the form of the 'British Business Bank'.
With the Bank of England at least thinking about undertaking more QE, how about doing something more imaginative, with new QE money going into the new Bank rather than the current big banks which are failing to deliver on lending to small firms?
It might also help the Chancellor who has boxed himself into a spending corner. He has so far been unwilling to boost demand, whether in a direct way through temporary and targeted tax cuts or more spending on infrastructure, or indirectly by capitalising at a decent level a fully-fledged new Business Bank aimed at lending to small firms.
Instead he is left fiddling around at the edges, desperately trying to find ways to boost growth without extra spending, through schemes such as FLS.
It's not working.
Professor David Bailey works at Coventry University Business School