(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 October.
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.
- 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)
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