King insists that the FLS has achieved its main objectives

Bank of England governor Sir Mervyn King said the Funding for Lending scheme has achieved its central objectives despite a “disappointing” drop in net lending.

Speaking to the Parliamentary Commission on Banking Standards on Thursday last week King said the scheme had cut the cost of funding for banks and stopped lending levels being much worse than they are.

His comments came after the latest figures from the Bank of England on the FLS showed net lending has actually fallen since the scheme’s launch in August.

The figures show participating lenders have drawn down £13.8bn from the scheme since August, £9.5bn of which occurred in the fourth quarter of 2012.

But net lending was -£2.4bn in the fourth quarter, despite the number of participants rising from 35 to 39 over the same period.

The scheme was designed to provide lenders with cheap funds as long as they maintain or increase their net lending. However, since the scheme’s launch, net lending has been -£1.5bn, as at the end of December.

Overall UK net lending, including that of non-FLS participants, was down by £2.7bn in the fourth quarter. The Bank of England says this total rose by £3.1bn in January 2013 but declined to specify how much of this was accounted for by FLS participants.

Net cumulative lending at Royal Bank of Scotland has decreased by £2.3bn while it has drawn down £0.8bn.

Since the scheme was launched in August, Barclays, Virgin Money and Nationwide have recorded the highest levels of cumulative net lending.

Barclays has loaned £5.7bn and drawn down £6bn, Nationwide has loaned £3.6bn and drawn down £2bn and Virgin Money has loaned £1.1bn and drawn down £0.5bn. Barclays has drawn down the most of any participant.

Santander and Lloyds Banking Group recorded a fall in net lending of £6.3bn and £5.6bn over the same period of time despite drawing down £1bn and £3bn, respectively.

King told the Parliamentary Commission on Banking Standards that the Bank knew when it created the FLS that the major UK banks were going to contract their balance sheets and lending to the real UK economy and there was nothing it could do about it.

He said: “What we could do was design a scheme that would give them an incentive to contract their lending to the real economy by less than they otherwise would have done. I think we have achieved it.

“The banks with the largest amount of capital have increased their lending such as Barclays, HSBC and Nationwide. Whereas RBS and Lloyds, not surprisingly considering their situation, have been contracting lending which is all completely natural. Only dealing with those legacy balance sheet problems will get us in to a better position.”

He added that the true test of success will come towards the end of this year but he is confident the FLS will appeal to all banks with different targets.

But Capital Economics UK economist Martin Beck says demand could be the issue and while it’s fine to make it cheaper for households to borrow, if they do not want to then the FLS is unlikely to have the impact the Bank is hoping for.

He says: “We are in an economy where households are heavily indebted and looking to reduce this burden. Firms are equally reluctant to borrow because consumer demand is so weak.”