(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By George Hay
LONDON, Dec 3 (Reuters Breakingviews) - The medicine
prescribed to get UK banks lending again isn’t really working.
But at least the side effects are positive.
“Funding for lending” was meant to give banks an extra
incentive to provide credit to small businesses and aspiring
home buyers. The scheme, launched by the Bank of England in
August, effectively allows banks that grow or at least maintain
their loan books to access funding that costs less than 1
percent - about 2 percentage points lower than market rates. It
works by allowing banks to park illiquid collateral with the BoE
for a small fee.
In its first two months, UK banks drew down 4.4 billion
pounds of FLS funding. Yet the overall 1.4 trillion pound stock
of loans in the domestic economy only rose by 500 million
pounds. And while Barclays (BARC.L) and Nationwide both
increased their net lending, the loan books of Lloyds Banking
Group (LLOY.L), Royal Bank of Scotland (RBS.L) and Santander
(SAN.MC) all shrank.
This muted impact could be speak of an inconvenient truth:
that the banks are right in their frequent protestation that low
rates of lending reflect weak demand rather than any
Scrooge-like credit decisions on their part. If so, the slight
rise in UK credit reflects no more than a modest return to
growth in the third quarter which would have happened regardless
of the steroids being plied to banks from Threadneedle Street.
Yet critics should delay judgment. The scheme is still in
its infancy. And it may not be a coincidence that rates quoted
for 2-, 3- and 5-year mortgages where buyers have a 25 percent
deposit all fell more than 10 basis points between August and
Moreover, the side effects look helpful too: the key benefit
of FLS may not be the stimulation of new lending, but the
prevention of harmful deleveraging. Banks may be using it to
roll over existing loan stock at lower cost. That will help
margins at a time when they are under severe stress from
recessionary conditions and charges for past sins such as
mortgage mis-selling. The result? More retained capital and
healthier balance sheets. Even if FLS doesn’t do what it says on
the front of the packet, it’s still worthwhile.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The Bank of England on Dec. 3 published the first set of
quarterly lending data from its Funding for Lending scheme
launched earlier this year. In the two months to the end of
September, UK banks used 4.4 billion pounds of FLS funding. In
the same period, cumulative net lending for the sector increased
by 496 million pounds.
- FLS: link.reuters.com/fyk44t
- For previous columns by the author, Reuters customers can
click on [HAY/]
(Editing by Chris Hughes and David Evans)
Keywords: BREAKINGVIEWS BRITAIN/BANKS
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