banks

British banks are set to significantly increase lending in the coming months as the government's programme to boost credit into the UK's moribund economy appears to be gaining traction and gradually replacing quantitative easing as the Bank of England's preferred tool in monetary policy.

The BoE's quarterly Credit Conditions Survey said banks increased lending to households and small businesses "significantly" in the three-month period ending in the middle of last month and that its poll suggested more loans would be made available in the first three months of this year.

"The availability of secured credit to households was reported to have increased significantly in the three months to mid-December 2012, driven in part by the Funding for Lending Scheme," the Bank said. "A further significant increase was expected over the next three months. Demand was generally expected to increase over the next quarter, except in the cases of credit card loans and lending to large businesses."

The Bank, along with the UK government, launched its "Funding for Lending" (FLS) scheme on 1 August with the aim of allowing below-market borrowing by participating banks, provided those banks commit to passing on that borrowing to the broader economy.

Around 30 banks, with around £1.3tn in outstanding UK loans, had signed up to the programme by the end of October. Based on FLS rules, which allow banks to tap the fund for five percent of their outstanding loans, the Bank had around £66bn in new funds to provide for the final two months of the year and into 2013.

"The Funding for Lending Scheme was widely cited as contributing towards the increase in secured and corporate credit availability," the Bank said.

The programme was born, in part, due to concerns that the Bank's £375bn asset purchase strategy, known as quantitative easing (QE), was not producing the desired effects in the recession-hit economy. In late September, BoE Deputy Governor Paul Tucker told Euroweek magazine that the programme, while still effective, "does not have the bite it used to have" and would be "no silver bullet" for UK growth.

Expansion surged in the three months ending in September, but many economists have warned that the one-time impact of the London Olympic Games means that pace is unlikely to be repeated in the final three months of the year. Others suggest Britain will be lucky to avoid a so-called "triple dip" recession and predict another quarter of contraction when the figures are published by the Office for National Statistics on 25 January. 

"The Committee discussed the likely effectiveness of further asset purchases, should they be required," the Bank's Monetary Policy Committee said in minutes from its October meeting. "Some members felt that there was still considerable scope for asset purchases to provide further stimulus.  Other members, while acknowledging that asset purchases had the scope to lower long-term yields further, questioned the magnitude of the impact that lower long-term yields on corporate debt and equity would have on the broader economy at the present juncture."

When similar concerns were expressed in the November meeting - and data suggested fourth-quarter growth would likely slow considerably from the 0.9 percent pace in the previous three months - some analysts began to note the Bank's preference towards the FLS scheme as its primary monetary policy tool.

"We have been starting to emphasise what we saw as a shift from QE to the FLS as the main policy medium," wrote RBS economist Simon Peck. "Focus now shifts towards bank lending data and in addition to MPC rhetoric surrounding bullish expectations for the FLS.

"Whether or not the FLS will be deemed a success will not become apparent until some way into 2013. In the meantime, the benefit of the scheme is that it is more dynamic than QE, in that (it) can be altered to fine tune its impact."