F&I Management & Training

The Bank of England has, Monday Dec 3rd published the initial data on the use of the UK Funding for Lending Scheme (FLS). 

The data reveals information from each group participating in the FLS (see chart below), the amount borrowed from the Bank, and the net quarterly flows of lending to UK households and businesses to the end of September, two months after the Scheme was launched.   In the quarter ending September 30, 2012, net lending by FLS participants was up by £0.5bn and total FLS drawdowns from the Bank were £4.4bn.

There are now 35 groups participating in the Scheme, which cover just over 80% of the stock of lending to the real economy.

Each FLS participant is able to borrow an amount up to 5% of its stock of loans to the UK non-financial sector as at June 30, 2012, plus any expansion of its lending from that date to the end of 2013.

The FLS works by reducing funding costs for banks and building societies, which allows them to reduce the price of new loans and increase their net lending.  Banks and building societies will need to expand their lending to maximize their benefits from the Scheme. 

Funding costs have fallen since the announcement of the FLS, but it will take time for reduced funding costs to feed through to lending volumes, given the typical lags involved in the loan application, approval and drawdown process.  It is therefore too early to use these data as a reliable indication of the impact of the FLS on lending volumes. 

Falls in funding costs

Paul Fisher, executive director for Markets at the Bank of England explained: “I am confident that the FLS will help the supply of credit. The incentives in the scheme are for banks and building societies to cut lending rates and hence lend more to get the cheapest funding.

“Since the scheme was announced we have seen widespread falls in funding costs across different sources and an equally wide variety of lending rate reductions. But it is too early to use these data as a reliable indication of the impact of the FLS on lending volumes.”

Ian Gordon of Investec said: “This morning’s data of FLS lending shows fairly predictable results. Barclays grew lending by an impressive £3.8bn, all of which triggers additional cheap funding at the lowest available rate – 25bps over Treasuries. RBS delivered net shrinkage of £0.6bn while Lloyds achieved negative net lending of £2.8bn.

“Lest we forget, Lloyds has promised to keep shrinking its core lending book until mid-2013. At least Barclays is positioned to grow. George Osborne can be grateful for that.”   Aside from the quoted UK banks, Santander posted a notable £3.5bn net reduction in lending. Positive contributions came from Nationwide (+£1.8bn), Coventry (+£0.6bn) and Virgin Money (+£0.6bn).

HSBC is also a significant net lender in the UK mortgage market, but not a Funding for Lending participant.

Awash with liquidity

Gordon added: “Total drawings of ‘cheap’ scheme funding so far amount to only £4.4bn (including Barclays £1bn, Lloyds £1bn and RBS £750bn.) This simply reflects the fact that UK banks are currently awash with liquidity following a relaxation of liquidity buffer requirements and with ongoing balance shrinkage at Lloyds/RBS. Further (substantial) drawdowns will follow over the next 13 months as banks de facto use the FLS scheme to replace existing (more expensive) retail and/or wholesale funding. As expected, only Barclays is really using the scheme to deliver what it is intended to achieve.

“To be clear, the Bank of England’s objectives are suitably modest and/or realistic. Funding for Lending may well be considered a success if it ensures less shrinkage than would otherwise have occurred.”  

Note that data may not sum to the total due to rounding. Data may be subject to revisions. If an institution has signed up to the FLS after the deadline for providing the previous quarter's net lending data has passed, net lending flows may be shown as n/a. These data should be available in the next quarterly release of data.

* The FLS measure of lending covers drawn sterling loans to households and private non-financial corporations (PNFCs) by the FLS Group, which includes all UK resident monetary financial institutions and related specialist mortgage lenders within a group.

DATED: 05.12.12

FEED: AFL