Lloyds, Nationwide Lead Pickup in Lending Through BOE Plan

Lending through the Bank of England’s flagship credit program rose in the second quarter, led by Lloyds Banking Group Plc and Nationwide Building Society, with banks expecting further expansion through the rest of 2013.

Lending rose 1.6 billion pounds ($2.5 billion) in the second quarter from the first three months of the year, the central bank said in a report on use of the Funding for Lending Scheme today. Nationwide and Lloyds lent a combined 3.5 billion pounds, while Royal Bank of Scotland Group Plc and Banco Santander SA’s U.K. unit paced declines.

“FLS participants collectively expect net lending volumes to pick up over the remainder of this year,” while indicators suggest “credit conditions are steadily improving for households and firms,” Bank of England Markets Director Paul Fisher said in the statement.

While the figures showed an increase for lending to individuals, they showed a decline for lending to small- and medium-sized companies. Banks and policymakers have come under criticism for failing to extend a lending recovery from mortgages to smaller firms. Bank of England Governor Mark Carney said last week that he would relax liquidity rules for some banks to stimulate loan growth and aid the recovery.

‘Wary’ Borrowers

“Mortgage approvals have picked up appreciably overall since the FLS was launched,” Howard Archer, chief European economist at IHS Global Insight in London, said in an e-mailed statement. Weak lending to companies “reflected weak demand as well as supply factors. There has clearly been low demand for credit, with many companies still very wary about borrowing.”

Lending is still down 2.3 billion pounds from a year earlier, before stiffer capital demands that banks blamed for restricting their ability to extend credit. Total lending fell 2.8 billion pounds at government-owned RBS in the quarter, and dropped 1.8 billion pounds at Santander U.K. Some 18 participant banks drew down a net 2 billion pounds from the FLS, while aggregate outstanding drawings were 17.6 billion pounds.

BOE data for July show lending to large companies rose by 1.4 billion pounds, and shrank by 894 million pounds for small-and medium-sized enterprises. From a year earlier, lending is down 3.2 percent for SMEs and down 3.4 percent for bigger companies.

Santander Repayment

Lending to individuals picked up in the quarter, though it shrank for businesses, according to today’s report, as large companies tap the capital markets if they can.

Nationwide said last week that it will begin lending to small businesses at “the right time.” The Financial Times had reported Britain’s biggest customer-owned lender was delaying a plan to expand into SME loans from this year to 2016.

Santander repaid 900 million pounds to the program as it sought cheaper funding in wholesale markets instead, the bank said in an e-mailed statement.

In the year to June, Santander said its business lending rose 2 billion pounds, while consumer lending fell 10.6 billion pounds. Capital rules have required the lender to cut residential mortgage lending by 6 pounds for every pound lent to a small- or medium-sized business.

Carney Guidance

Carney said last week that the main U.K. lenders will be allowed to shrink required holdings of low-yielding, easy-to-sell securities, such as government debt, once they hold capital reserves equivalent to 7 percent of their risk-weighted assets. That “will help to underpin the supply of credit,” he said.

The FLS started in August 2012 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.

An overhaul of the FLS in April 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 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.

“Although the FLS has not proved to be a miracle cure for the economy’s credit ailments, there seems little doubt that the situation would have been worse in its absence,” Simon Hayes, an economist at Barclays Plc and a former BOE official, said in a research note. The program “remains a backstop source of relatively cheap funding should market conditions deteriorate.”

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