Bank of England announces changes to Funding for Lending Scheme

POSTED: 13th December 2013
IN: Business news

The Bank of England has announced changes to the terms of the Funding for Lending Scheme (FLS) to focus on increasing lending to businesses, by removing direct incentives to expand household lending.

undefinedThe Governor of the Bank, Mark Carney said the reason for the change in policy was to avoid the housing market overheating.

He said that the element of the FLS that allowed banks to borrow money at below market rates in order to pass on to households through loans had worked and had helped increase competition in the mortgage market.

He said that the housing market is functioning as it should and no longer needed this type of support. The government has recently launched the Help to Buy scheme that provides further support to first-time buyers who struggle to save up a deposit.

Mr Carney said: “Risks to financial stability may grow if there are further substantial and rapid increases in house prices and a further build-up of household indebtedness.

"It is no longer appropriate to have our foot on the accelerator.

“By acting now in a graduated fashion, authorities are reducing the likelihood that larger interventions will be needed later.”

The decision comes as something of a surprise because previously Mr Carney had underplayed suggestions that government and central bank policies were in danger of generating a house price bubble with only London seeing big house price rises and prices still well below their 2008 peak in many parts of the country.

The Bank also announced that lenders will now have to hold more capital for each new home loan made. This will make it less profitable for lenders to issue new mortgages.

The FLS will now focus solely on lending to small businesses to try and unlock further business investment to support the strengthening recovery and is seen as a key part of the attempts to rebalance the economy away from being too reliant on consumer spending.

Mr Carney said: The changes announced today refocus the Funding for Lending scheme where it is most needed - to underpin the supply of credit to small businesses over the next year - without providing further broad support to household lending that is no longer needed."

He added: "Since the FLS was launched it has contributed to a substantial fall in bank funding cost, this has fed through to a significant improvement in household credit conditions. Given this success there is no longer a need for FLS to provide further broad support to household lending".

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