Of all the schemes we have seen since the onset of the credit crisis, the FLS is the first one that targets lending to the real economy and incentivises banks and building societies to grow their lending overall.
Unfortunately, although data has revealed a strongly growing list of participants in the scheme, latest count there are 35, net lending by FLS participants to 30 September was +£0.5bn and total FLS drawdowns from the Bank were £4.4bn.
However, probably unsurprisingly, the media headlines have focussed on the six largest lenders and the conclusion is different: overall lending across these lenders fell by £1.04bn during the period.
So why is this happening and can anything be done to finesse the scheme? Firstly, falls in lending of the largest banks shouldn’t be a surprise.
This group includes Lloyds Banking Group and Royal Bank of Scotland, both of which are undergoing radical surgery and deleveraging.
The fact that they are shrinking their loan books shouldn’t be a surprise. Secondly, many analysts claim that lending is being focussed on lower risk areas such as low LTV mortgages rather than areas that need help such as first-time buyers. I am sure this is true.
Can anything be done about it? Yes but with difficulty is the answer. The FLS is a compromise. It was put together in an extremely short time and is basically a tweaked Special Liquidity Scheme.
The obvious thing to do would be to tweak it a bit further and change the incentives to focus lending activity where it is needed. Although simple in practice I think this is unlikely to happen. The tightrope that the Bank of England had to walk was to balance the needs of the market within the constraints imposed by Europe. Yes Europe!
To focus the FLS in the way I describe would almost certainly fall foul of the European State Aid rules and would be deemed to have provided an unfair advantage over other countries. Frustrating but there it is.
So the FLS is doing the best it can. It really is still early days and there are lenders coming on stream all the time.
Some of the smaller lenders have already commented on the fact they are able to offer more competitive products on the back of the scheme which can’t be a bad thing. We need to give it some more time and assume that overall it is beneficial to the market.
In my view we should be looking to the smaller lenders to make the difference to the key risk areas that need help and not the large banks who can’t or just don’t need to.One to watch.