By Daniel Hunter

The Bank of England's Funding for Lending Scheme (FLS) is set to fall £80 billion short of its target.

Figures released in the Bank of England's Quarterly Bulletin have revealed that banks and building societies could be penalised if they used the FLS but shrank their loan book by more than 3%.

The Bank's flagship cheap loans scheme is no longer as attractive as when it was launched. On its launch the Treasury said it could lower borrowing costs on £80 billion of the UK loan stock — driving more and cheaper credit through to households and businesses. According to the Bank’s figures, however, it will now only be effective on about £50 billion.

The change is largely due to a sharp fall in funding costs in the market. When the scheme was first announced in June, the cheapest market rate was 2.7%, with banks currently able to fund the market for as little as 1.7%.

“The FLS will continue to provide a cushion against fluctuations in funding costs, for example if investor concerns about euro-area strains were to intensify again," the Bank said.

“There is evidence suggesting that the reduction in bank funding costs is beginning to feed through to the terms and availability of credit. Lenders reported in the third quarter that mortgage availability had increased markedly.”

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