The central bank admitted yesterday there was a possibility that banks would use the additional funding to boost their own financial position.
The Bank’s inflation report said Funding for Lending could well increase lending to businesses, but warned that its impact would be “difficult to quantify”, and highlighted the risk that banks would fail to pass the money on to businesses and consumers.
Funding for Lending, announced last month, was intended to increase the amount lent to households and businesses, and lower the costs.
The report said: “It is possible that some banks raising funding through the scheme will take the opportunity to boost profits and capital rather than lowering lending rates, although healthier capital positions would still yield a longer-term benefit”
“The Funding for Lending scheme is bigger and bolder than any initiative so far tried to get the banks lending again. Although its overall impact is uncertain, the early indications are positive, with some banks cutting their loan rates.”
At a press conference after the report’s publication, governor Mervyn King insisted that “these incentives will undoubtedly make life easier for the banks because it lowers their funding costs”.
“Banks are naturally being very, very cautious about expanding their balance sheets. They’re contracting it in order to put themselves back in a position where markets will think that it’s a better risk to lend to this bank than another bank.”
The availability of loans and the high cost of mortgages has put a stranglehold on many construction firms, particularly housebuilders.