Funding for Lending a ‘stop-gap’

Expectations about what the Government’s Funding for Lending scheme can deliver are “too high” and it should only be seen as a “stop-gap solution”, warned the Council of Mortgage Lenders last week.

In its fortnightly newsletter, News & Views, the trade body says while the scheme is useful, it should not be viewed as a replacement for other forms of funding, like wholesale funding or retail deposits.

The scheme, which is open for the next 18 months, allows eligible institutions to borrow up to 5 per cent of their existing loan books in UK Treasury Bills for a 0.25 per cent fee for a period of up to four years.

The scheme encourages lenders to increase their lending, with a promise of more funds at 0.25 per cent if they do. However, lenders that shrink their loan books will have to pay more for the funds, up to a maximum of 1.5 per cent.

The CML’s newsletter says: “While the new Funding for Lending Scheme, which enables lenders to access cheap funds from the Bank of England at rates that get more attractive the more they increase their net lending, is a useful stop-gap, it is already suffering from expectations that are too high about what it can deliver.”