Santander, RBS Lead Drop in Lending by BOE Credit Program

Banco Santander SA (SAN) and Royal Bank of Scotland Group Plc led a drop in U.K. lending in the first quarter as overall credit declined, the Bank of England said.

Lending by the banks fell a combined 3.9 billion pounds ($6 billion) from the fourth quarter, the BOE said in a statement in London today on usage of its Funding for Lending Scheme. Total FLS net lending fell 300 million pounds, less than the 2.4 billion-pound drop in the final three months of 2012, and the BOE said it expects a further improvement later this year.

The central bank and the U.K. Treasury in April extended the program by a year and increased incentives to get credit to smaller companies to provide additional support to the economy. The BOE said today many lenders intend to participate in the extension and the plan will prevent the drop in lending this year it had previously expected.

“The picture of flat lending growth overall is broadly as expected at this stage reflecting reductions in some legacy portfolios being roughly offset in aggregate by expanding new lending,” BOE Markets Director Paul Fisher said. “The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013.”

Photographer: Simon Dawson/Bloomberg

A pedestrian passes a Banco Santander SA bank branch in London. Close

A pedestrian passes a Banco Santander SA bank branch in London.

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Photographer: Simon Dawson/Bloomberg

A pedestrian passes a Banco Santander SA bank branch in London.

FLS participants drew down a net 2.6 billion pounds from the program in the first quarter after 9.5 billion pounds in the fourth quarter. Aggregate outstanding drawings were 16.5 billion pounds.

‘Disappointing’

The FLS was unveiled by BOE Governor Mervyn King and Chancellor of the Exchequer George Osborne last June. Cumulative net lending fell 1.8 billion pounds since the end of June 2012, according to today’s report. King will lead his last Monetary Policy Committee meeting this week before he retires at the end of the month and is succeeded by Bank of Canada Governor Mark Carney.

The data “can only be described as disappointing,” Jens Larsen, economist at RBC Capital Markets and a former central bank official, said in a statement. “For now, we do not expect further action, but policies to enhance credit growth will surely be one of Mark Carney’s key concerns when he takes over at the Bank of England on July 1.”

Nationwide Building Society led lending in the first quarter, with 1.2 billion pounds of positive net flows, and it borrowed 500 million pounds from the plan. Barclays Plc (BARC) didn’t use the FLS in the first quarter, and made 1.1 billion pounds of loans. Co-Operative Bank Plc led users of the facility, borrowing 900 million pounds, while its lending fell 12 million pounds.

“Barclays welcomes anybody who needs finance to come and talk to us,” Daniel Hunter, spokesman for Barclays, said in an e-mailed statement.

FLS Extension

Lending by Lloyds Banking Group Plc (LLOY) fell 983 million pounds in the first quarter and it didn’t use the FLS, today’s report showed. Lloyds said it is increasing lending to small- and medium-sized companies and that as part of this focus it is “running down certain non-core parts of our business.” The decline in lending reported in the BOE data “is entirely the result of this shift,” it said in a statement.

The program started in August and allows banks to borrow treasury bills from the central bank to fund lending. Under the original plan, they had 18 months to use the facility. That plan also only allowed banks with access to the BOE’s discount-window facility to use the program.

The April overhaul of the FLS extended it to January 2015 and allows banks to borrow 10 pounds next year for every 1 pound they lend to small companies this year. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. The plan was also expanded to allow access to some non-bank lenders such as financial leasing corporations, which provide credit to smaller companies.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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