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The FLS should not be written off

This week has seen the Bank of England publish utilisation data under the Funding for Lending Scheme and the almost universal verdict that the scheme hasn’t worked quite the way it should have. Well I’m not in that camp. At least not at the moment.

Tony Ward MS blog

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.

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  • GHU 6th December 2012 at 4:01 pm

    I think that there could be a number of unintended consequences of this facility and that perhaps it is not realised just how labour intensive and potentially costly it is for a small lender to become part of the scheme.

    It is no easy task getting access to this funding and the information required on a weekly basis by the BoE requires substantial man hours. My understanding is that BoE requires well over 200 pieces of separate information on each mortgage that forms part of the scheme and for a small lender this is, pro-rata, quite onerous. I further understand that it is quite costly to become a member and whilst this might be a gnat bite for the ‘big six’ it is a significant cost for a small Building Society. As with most things financial the scheme is geared to the large players.

    As regards the unintended consequences the problem is as to whether FLS will ultimately create new home owners or as to whether it will just further re-mortgaging. To get maximum benefit from the scheme a lender has to grow its mortgage book but that has often been at the expense of another lender. So creates the mortgage war for exactly the same customers – great for re-mortgage but not so great for FTBs and people who are finding it increasingly difficult to move home – the so called mortgage prisoners (even though I loathe such emotive epithets). It is also the case that we are already seeing savings rates plummet and, when bearing in mind that there are up to 8 savers for every borrower, more money is being taken from the economy that could otherwise assist growth. I know that borrowers are benefitting from lower rates but the situation is now becoming even more inequitable especially in an already low interest rate environment.

    We can already see the impact of FLS in some of the headline fixed rates that some of the large lenders have been offering but it is notable that these are targeting the low LTV deals. In simple terms large lenders would seem to be targeting the quality books of other lenders to achieve their growth in that way. This targeting is especially hard on the small Societies as they have had to suffer the requirements of the Building Societies Sourcebook which is dictating the shape of their lending. So if that small lender loses its prime residential borrowers it will have an impact on how much BTL business it can hold on its book and the high price that BTL attracts has to some extent subsidised some of the prime residential costs. There is therefore the potential for a vicious circle that can only benefit those large lenders that have already proven themselves to be less than reliable.

    FLS is great and brings a lot of cheap money to the market but as to whether it will actually increase the number of new borrowers has to be open to question. I, for one, am not holding my breath.