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New scheme will boost credit supply

LONDON - A Bank of England scheme to give banks cheap funding will boost the supply of credit to the recession-hit economy because a large number of lenders have signed up, central banker Paul Fisher said.

The government and the BoE started the scheme in August, hoping to unblock lending by offering up to 80 billion pounds ($130 billion) of cheap funds to lower banks’ funding costs.

“I am confident that the FLS (Funding for Lending Scheme) will help the supply of credit,” Fisher said on Tuesday. “Before its introduction, it was more likely than not that the stock of credit would contract further over the next 18 months.”

Fisher also said in a speech that 13 lenders had signed up for the scheme, representing 73 percent of the stock of lending to households and companies. A significant number of other institutions were close to signing up, he said.

It may take banks a while to fully review their lending plans, and drawings on the scheme will likely be spread out over the full timeframe to the end of 2013, Fisher said. The BoE will provide details about banks’ use of the scheme on Dec. 3.

Fisher said five of Britain’s six largest banks had signed up for the scheme. HSBC said right at the start it did not want to participate as it preferred to fund lending through customer deposits.

A lack of lending is one of the obstacles to recovery for the economy. The BoE has said banks’ funding costs have risen because of fears about the euro zone debt crisis.

Fisher said unconventional policies such as the BoE’s asset purchases or the new lending scheme were the “new normal”, reflecting the seriousness of the economic crisis and constraints on fiscal policy.

Previous schemes to spur lending since the financial crisis have failed to give a clear boost to the economy.

Banks have blamed the weakness in the economy for the fall in lending, saying companies have little appetite for borrowing with the country mired in recession since late last year.