The Treasury and Bank of England (BoE) have just announced plans to change how the Funding for Lending Scheme (FLS) operates, and as of next year, banks will no longer receive subsidised funding to encourage mortgage lending and personal loans.
The announcement comes as both the chancellor George Osborne and BoE governor Mark Carney agree that the problems with household lending have been largely fixed, with the efforts of the FLS instead needing to be concentrated on subsidised lending to companies and small businesses.
It's also an indication that the organisations don't want mortgage lending to get out of hand, with mortgage availability already largely improved across the sector.
The Funding for Lending Scheme was originally designed to encourage lending to the UK real economy and was intended to last until January 2015, but with increased activity in the housing market, significantly improved lending to homeowners and markedly reduced mortgage rates already being witnessed the BoE felt it was no longer needed. But, the same can't be said for the corporate arena, where business lending remains largely muted.
That means, as of February next year, the FLS will be cancelled for household lending while it will remain intact for businesses, with Mark Carney saying the move is to ensure the FLS "continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary."
The chancellor echoed his thoughts, with both parties agreeing that although the FLS has significantly improved credit conditions and has been a vital part of the recovery, the focus now needs to be on underpinning the supply of credit to SMEs.
Under the changes, banks will still be able to bring mortgage assets forward for cheaper funding but household lending won't generate any additional borrowing allowances – instead, they'll only have access to additional funds if they can prove they're increasing net lending to companies too. At the same time, the FLS fee for corporate lending will also be cut, in an attempt to incentivise lending even more.
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