Budget 13: Osborne reveals talks with BoE to extend FLS

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Chancellor George Osborne today confirmed he has held talks with the Bank of England about the possibility of extending the Funding for Lending scheme.

Announcing today’s Budget, Osborne hinted the scheme could be extended but did not provide any further details.

The Funding for Lending scheme, which was launched in August, is the Government’s attempt to boost lending to businesses and households by offering lenders cheap funding as long as they promise to maintain or increase their net lending levels.

It works by allowing banks to borrow Treasury Bills over the 18 months to January 2014, which will be lent over four years. Each participating lender can borrow 5 per cent of its existing loan stock, however they are incentivised to boost lending because every pound of additional lending would be eligible for the scheme.

For example, a lender with a loan stock of £100bn would be able to borrow £12bn in funding from the FLS – an initial allocation of £5bn plus a further £7bn in additional lending. The cost, for lender which maintain or increase their lending, is 0.25 per cent a year on what they withdraw from the FLS. This increases by 0.25 per cent for every 1 per cent fall in net lending, up to a maximum of 1.5 per cent if their net lending falls by 5 per cent or more.

Figures released by the Bank earlier this month revealed a disappointing response from participants. Participating lenders were shown to have drawn down £13.8bn from the scheme since August, £9.5bn of which occurred in the fourth quarter of 2012.

However, net lending was -£2.4bn in the fourth quarter, despite the number of participants rising from 35 to 39 over the same period, and net lending was a negative £1.5bn since the scheme launched.

Earlier this month, deputy prime minister Nick Clegg reportedly called for the programme to be “put on steroids” following the slump in lending announced by the BoE.

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