A report published in its Quarterly Bulletin concluded early indicators suggested the transmission mechanism of the government-backed scheme was working as expected.
It stated: “The Scheme appears to have contributed to lower bank funding costs. There are early indications that it has begun to flow through into credit conditions, including falls in loan rates.
“The next stage might be a gradual pickup in mortgage approvals, although data on these can be volatile from month to month.”
The Bank of England’s lender credit conditions survey confirmed mortgage availability had increased markedly over Q3 and would continue to grow in Q4, it said.
Quoted mortgage rates were no longer increasing and had started to fall for some products, such as fixed-rate mortgages, according to lenders.
The report acknowledged the difficulty of assessing results compared to what it called “the counterfactual” – the state in which credit conditions would have been if the scheme had never been introduced.
“The FLS should lead to more, and cheaper, credit flowing into the economy than otherwise,” it stated.
“But the cost of funding through the FLS is only one of the factors determining the supply of credit to the real economy.
“Other supply factors – such as the response of other bank funding costs and the need for some banks to repair their balance sheets – will also affect the volume of loans extended, as will credit demand.”
FLS makes it cheaper for lenders to fund loans than if they relied on funding from households and businesses.
The thirty-five banking groups signed up to the scheme by 3 December 2012 received an initial entitlement of roughly £68bn in funding. As a result of net lending of £7.6bn by participating groups, the scheme’s incentives meant the total amount borrowed increased to £76bn from December.
In an example given by the report, a bank which had an initial stock of £100bn and planned gross lending of £3bn would be entitled to £5bn in FLS funding. For every additional £1bn increase in net lending funded at the market rate, the price on the FLS funding falls buy 25 basis points, meaning the bank has an incentive to deleverage less than would otherwise be the case.
