Banks cut lending despite Bank of England largesse

LONDON Mon Mar 4, 2013 11:31am GMT

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LONDON (Reuters) - The Bank of England's flagship plan to boost lending failed to stop a slide in what British banks hand out in the final three months of 2012, adding to central bank pressures to give more of a boost to the economy.

Monday's figures showing a cut in lending came alongside a darkening economic outlook. February construction data released at the same time showed the biggest fall in activity since October 2009.

Last week brought an unexpected drop in manufacturing.

Sterling fell to a session low against the dollar after the weaker-than-expected construction survey added to concerns the economy could slip into its third recession in four years.

It will also play on Thursday's Bank of England decision on whether to increase bond purchases, or quantitative easing.

The issue is seen as finely balanced. Three of the nine policymakers - including Governor Mervyn King - unexpectedly voted last month to restart purchases, which have the effect of pumping money into the economy.

Monday's data may shift some of the waverers. The Funding for Lending Scheme, which started operating in August, had been designed to stop falls in lending by British banks, even if significant increases in lending were some way off.

But banks and building societies cut lending by a net 2.425 billion pounds between October and December, in contrast to an increase of around 1 billion pounds in the first months of the scheme's operation.

The central bank said some of this may be due to seasonal factors, and that lending by banks as a whole - including those not taking part in the scheme - had picked up in January.

Nonetheless, total net lending by banks and building societies taking part in the scheme - which includes all major British lenders apart from HSBC (HSBA.L) - was down by 1.502 billion pounds in the second half of 2012.

This is despite the fact that the lenders have taken advantage of 13.832 billion pounds of cheap funding from the central bank.

"I would not expect to see a return to rising aggregate quantities until we start getting data for 2013 at the earliest," said Paul Fisher, the central bank official in charge of the scheme.

The FLS offers banks cheap finance in exchange for illiquid collateral such as portfolios of business loans, so long as they maintain or increase lending levels. It has led to a marked fall in banks' borrowing costs and lower interest rates or easier terms and conditions for some borrowers.

However it has faced criticism for appearing so far to benefit home-buyers over small businesses, and for reducing the interest rates available to savers.

Alan Clarke, economist at Scotiabank, said increased FLS borrowing gave some grounds for optimism that further lending may be in the pipeline.

"The fact that there is take-up of this size is quite encouraging," he said.

"There is no accident that mortgage approvals have improved for most of the last six months, and so it is some help. But clearly we're hardly growing so it's not been a miracle cure. So we'll have to assess that in the quarters ahead," he added.

(Reporting by David Milliken; editing by William Schomberg)

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