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BoE extends Funding for Lending scheme by a year

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The Bank of England has extended the Funding for Lending scheme by a year and the incentives offered have been “heavily skewed” towards lending to small and medium sized businesses.

Banks and building societies will now be able to make drawdowns from the scheme, which was launched in August last year, until the end of January 2015. However, banks which reduce their net lending will not be able to access the cheap funding beyond January 2014.

In the year to the end of January 2015, lenders will be able to draw £5 from the scheme for every £1 of net lending to SMEs in 2014.

Additionally, in order to encourage lenders to lend to SMEs sooner, every £1 of net lending to SMEs during the remainder of 2013 will be worth £10 of access to cheap funding in 2014. As is currently the case, lenders will have £1 of access to cheap funding for every £1 in net lending to mortgage borrowers.

The FLS will also now take account of lending to certain non-bank lenders, such as financial leasing corporations and mortgage and credit corporations

In a letter to Chancellor George Osborne, published this morning, outgoing Bank of England governor Sir Mervyn King says: “The extension of the FLS will maintain easier funding conditions for banks into 2015, and thereby help to support credit conditions and the recovery in our economy.”

Osborne says: ”This is a big boost for the small and medium sized businesses that are at the heart of the British economy. The Funding for Lending Scheme has already reduced the costs of household mortgages and loans for businesses. This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

The fee structure and the way the scheme works will remain the same during the extension period, other than the changes made to encourage SME lending.

For banks maintaining or expanding their lending over 2014, the fee will be 25 basis points per year on the entire amount borrowed for up to four years. For banks that lend less, the fee will increase by 25 basis points for each 1 per cent fall in net lending, up to a maximum fee of 1.5 per cent of the amount borrowed for banks that reduce their lending by 5 per cent or more.

Lenders deposit collateral with the Bank as a security and each lender can access up to 5 per cent of its existing stock of loans to SMEs and households and are incentivised to boost lending because every pound of additional lending would be eligible for the scheme.

The FLS has been criticised by some for getting off to a slow start.

While the aim of the scheme is to boost net lending to small businesses and households, data provided by the BoE shows net lending fell by £2.4bn in the final quarter of 2012. However, the FLS has been credited with reducing mortgage rates since it launched.

Building Societies Association director general Adrian Coles says: ”Though welcoming the extension of the scheme, building societies are legally required to focus their lending on residential property so lending by building societies will continue to be predominantly mortgages to homebuyers. However, more recent data show that mutuals, backed by their strong business models, continue to increase their lending into 2013, indicating that building societies and other mutuals lenders have an important role in increasing lending to the real economy.”

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