U.K. plan to boost lending fails as net lending decreases

126px-London.bankofengland.arpThe U.K.’s plan to boost lending did not prevent a decline in bank loans late last year, increasing pressure on the Bank of England to provide an alternative source of stimulus.

The Funding for Lending Scheme launched by the finance ministry and central bank last year sought to provide cheap funding to banks if they increased lending to small and medium-sized businesses and homebuyers as part of an effort to aid growth, Fox Business reports.

However, recent data revealed that while banks and other institutions in the U.K. accepted nearly $21 billion of central bank funds, net lending has actually fallen, overtaking a small lending increase in August and September.

“It is pretty clear that the FLS is not living up to its expectations,” Michael Saunders, the chief U.K. economist at Citi, said, according to Fox Business. “The limited impact from the FLS raises the likelihood of other forms of easing and additional credit easing in our view.”

The Bank of England will decide later this week whether to re-launch its bond-buying program. Last month, three U.K. officials, including Bank of England Governor Mervyn King and FLS head Paul Fisher, advocated last a plan to purchase another $37.7 billion in bonds in addition to the $566 billion bought between March 2009 and October.

The FLS plan, though it has not worked to increase lending, has helped reduce banks’ borrowing costs, which has contributed to lower interest rates and more lenient loan terms for some borrowers, Fox Business reports.

Additionally, some economists are encouraged by the data because nearly $15 billion in FLS funds had been drawn out by banks in the last three months of the year, double the amount in the first two months after the plan’s implementation.

Banks have until year’s end to pull out funds equal to five percent of their loan portfolio but will face penalty interest charges if they are unable to maintain or increase lending, according to Fox Business.

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