U.K. Banks See Tighter Lending Terms in Third Quarter, BOE Says

U.K. households and companies may face tighter borrowing terms in the third quarter as lenders pass on higher funding costs, a Bank of England survey showed.

Spreads on secured lending to households widened markedly in the second quarter and are expected to widen significantly in the third, the central bank in London said in its credit conditions survey. Only large firms escaped a tightening of borrowing terms in the second quarter and spreads on loans to firms of all sizes are predicted to rise markedly.

“A further marked widening of spreads was expected across secured household and corporate lending in the next three months, as the elevated cost of bank funding is passed through to borrowers,” the report said. “The outlook for the economy and tightness in wholesale funding markets” weighed on the availability of secured credit to households.

The report underlines the strains in financial markets that are threatening the growth outlook as Europe’s debt turmoil raises bank funding costs. The Bank of England and the Treasury will announce within weeks details on a new program to get banks to boost lending.

The survey, taken between May 14 and May 31, found the overall supply of credit was on balance unchanged in the latest quarter. The availability of secured credit for households was expected to be unchanged in the next three months, though deteriorate “markedly” for borrowers unable to put down a significant downpayment.

U.K. house prices fell in June as the economy struggled to rebound from a recession and the end of a tax break continued to weigh on demand, Nationwide Building Society said today. Prices dropped 0.6 percent from May, and fell 1.5 percent to an average 165,738 pounds ($258,000) the biggest drop since August 2009.

The British Bankers’ Association yesterday reported that net mortgage lending fell in May for the first time in at least 15 years as home-loan approvals dropped.

The Bank of England’s Financial Policy Committee will present its semi-annual report on the stability of the financial system at a press conference in London tomorrow chaired by Governor Mervyn King. Officials met last week, and may say that banks’ liquidity requirements should be eased to spur U.K. lending.

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