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* UK banks using FLS scheme cut net lending in fourthquarter
* Some economists say this boosts case for more QE
* BoE says banks have taken almost 14 bln stg of FLS funds
* BoE and banks blame seasonal factors for fall in lending
* Business minister calls figures "very disappointing"
By David Milliken
LONDON, March 4 (Reuters) - The Bank of England's flagshipplan to boost lending failed to stop a decline in bank loanslate last year, adding to pressure on the central bank providealternative economic stimulus.
Britain's Funding for Lending Scheme (FLS) was launched bythe central bank and finance ministry last June to aid growth byoffering banks cheap funds if they stepped up lending tohome-buyers and small and medium-sized businesses.
Monday's data shows that while banks and building societieshave drawn down almost 14 billion pounds ($21 billion) of cheapcentral bank funds, net lending has actually gone into reverse.
Business minister Vince Cable - a Liberal Democrat whofavours more government investment than his Conservativecoalition partner and finance minister George Osborne - said thefigures were "very disappointing" and that he would ask thecentral bank if the scheme could be improved.
Britain's economy looks increasingly like it may be tippinginto its third recession in four years, following very weakconstruction data earlier on Monday and an unexpectedcontraction in factory output reported last week.
Borrowers repaid banks and building societies some 2.425billion pounds more than they lent in the last three months of2012, turning around a small rise in lending in August andSeptember.
"It is pretty clear that the FLS is not living up toexpectations," said Michael Saunders, chief UK economist atCiti. "The limited impact from the FLS raises the likelihood ofother forms of easing and additional credit easing in our view."
The central bank will decide on Thursday whether to restartits quantitative easing programme of buying government bonds.
Last month, three officials - including Governor Mervyn Kingand Paul Fisher, who is in charge of the FLS - favoured buying afurther 25 billion pounds of bonds on top of the 375 billionbought between March 2009 and October 2012, while others feltalternative stimulus might be more effective if needed.
If wavering policymakers conclude the FLS is not having thedesired effect, this could cause them to back more bond buying.But it is far from certain that they will draw this conclusion.
Although the scheme has not yet succeeded in boostinglending, it has helped markedly reduce banks' borrowing costs,which has in turn fed through to lower interest rates and easierterms and conditions for some borrowers.
The central bank said the fall in lending in the last threemonths of 2012 was due to seasonal factors. Lending picked upstrongly in January, albeit based on data that includes bankssuch as HSBC which did not join the FLS.
"I would not expect to see a return to rising aggregatequantities until we start getting data for 2013 at theearliest," the BoE's Fisher said.
"It is still quite early for much extra money to have flowedfrom the application stage into actual loans, compared withprevious plans which showed that lending was most likely to fallin aggregate without the FLS."
MUTED DEMAND?
The British Bankers' Association said demand for lending wasmuted in the last three months of 2012, citing both a seasonaldip and firms' broader concerns about the economic outlook.
But some economists did see encouraging signs in the schemedata, particularly the fact that almost 10 billion pounds hadbeen drawn down by banks in the last three months of 2012,double the sum in the first two months of the scheme.
"It's not been an overnight surge, but it's moving in theright direction," said Alan Clarke of Scotiabank. "It was abigger number than I thought would come."
Banks have until the end of this year to draw down fundsequivalent to 5 percent of their loan book - roughly 70-80billion pounds based on current lending - but will face penaltyinterest charges if they do not maintain or increase lendingover the period.
The British Chambers of Commerce, which represents manysmall firms, said Monday's figures were "disappointing", whilethe Confederation of British Industry, which represents biggerfirms that generally have easier access to credit, said itsmembers were reporting lower finance costs.
The aggregate FLS figures mask wide differences betweenlenders. Newer entrants to Britain's concentrated bankingmarket, such as Aldermore, Metro Bank and Shawbrook Bank, haveincreased lending sharply.
But far larger, more established banks such as Royal Bank ofScotland, Santander and Lloyds Banking Group feel under regulatory pressure to reduce much non-corelending, and have cut lending by several billion pounds each.
Bucking this trend among major lenders are Barclays, which has increased net lending by 5.7 billion pounds,and Nationwide Building Society, where lending has risen by 3.6billion pounds.
