Bank of England governor Sir Mervyn King says 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 today, King said the scheme had cut the cost of funding for banks and stopped lending levels being much worse than they are.
Bank of England data showed net lending was £2.4bn lower in Q4 2012 in the first lending figures available since the FLS launched in August.
Participating lenders have drawn £13.8bn from the scheme since its launch, £9.5bn of which occurred in Q4 2012.
King said: “We knew when we created the FLS that there were major UK banks going to contract their balance sheets and lending to the real UK economy and there was nothing we could do about it.
“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.”
King says 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.