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The Bank of England changes course on Funding for Lending

The Bank of England changes course on Funding for Lending Shaun Richards

Yesterday saw a change of tack by the Bank of England in its operation of UK monetary policy. During 2013 it has found itself operating in a rather hand in glove manner with the UK coalition government. This has been most evident in its approach to the housing market where it would have been hard to argue that there was any evidence of the claimed independence of its policy.

Funding for Lending Scheme


Back on the 13th of July 2012, the Bank of England launched the Funding for Lending Scheme which had one main objective:
"The FLS is designed to incentivize banks and building societies to boost their lending to the UK real economy."

The main mechanism by which this was supposed to be achieved was by yet another in a long list of subsidies to the UK banking sector:
"It does this by providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance."

However, the FLS did not work as originally promised. The promised extra business lending turned out to be a chimera, whilst mortgage lending was prioritized by the banks  and increased. So, the FLS played its part in the rise in mortgage lending which, at £15,62 billion, was some 38% higher this September than in September 2012. Meanwhile, lending to small businesses fell. You do not need to take my word for this as there was an implicit admittance from the Bank of England on the 24th of April:
"The improvement in credit conditions since summer 2012 has been less marked for small and medium sized enterprises (SMEs) than for larger businesses and households."

The talk of credit conditions, rather than increases in lending, spoke volumes!

As you read the paragraphs above it becomes clear why I christened the FLS as the Funding for Mortgage Lending Scheme.

A Problem


The Bank of England must have winced when it found that the UK coalition government had plans to boost the housing market too. The Help to Buy scheme began for new properties in England in April and was then, in something of a surprise move, extended to all properties at the Conservative party conference this autumn. This was earlier than the planned 2014 opening, and came on the back of signs that the UK housing market was seeing house price rises on a widespread basis. These were now coming in areas other than the center of London which has been running white hot for some time now. Specters and ghosts of past UK policy mistakes must have been running up and down the Threadneedle Street corridors of the Bank of England. Also, the new Governor Mark Carney would have been anxious to avoid any accusations of political bias - especially after his history at the Bank of Canada.

Yesterday's change


This is summed up by this part of the announcement:
"Household lending in 2014 will no longer generate any additional borrowing allowances. Instead additional allowances will now only reflect lending to businesses in 2014."

So there will be quite a change of course for Bank of England monetary policy in the new year. There will be a withdrawal of support for the housing market which has so far amounted to £17.6 billion of cheap (can be as low as 0.75% per annum) funding. This will hopefully stop the danger of it overheating due to the Bank of England having its foot on the accelerator. Also, there is a flicker of hope that UK banks will turn their attention to business lending again. This would be welcome after the recent scandal at Royal Bank of Scotland, where it looks as though it has been pushing them underwater rather than helping.

What about savers?


There will be hopes that they will see a benefit from this change of tack too. If UK banks do not have such a ready supply of cheap funding from the Bank of England going forwards, they are likely to compete more for UK savings business which savers will hope will lead to higher deposit savings rates.

Comment


Let us hope that this change of policy will lead to the UK having a more balanced economic policy going forwards. For this to really work, we need more funding to be available to smaller businesses which sadly have not been a feature of the scheme so far. But, for now, it is nice for once to be able to applaud the promised intentions of the Bank of England!

Of course, saying something and actually doing it are different things so let us cross our fingers that the promised extra business lending actually takes place.


There was an irony in us being told yesterday that the Funding for Lending Scheme of the Bank of England was going to be focused on business lending in 2014. This was that it was supposed to be doing this in the first place and was reformed again on the 24th of April with the same promise. So the danger here is of it looking rather like the boy who cried wolf.
Those worried by the way that the central London property market seems to be running white hot will welcome the fact that this from of mortgage lending assistance will be phased out. However many of these purchases are in fact for cash (estimates range as high as 60%) so the dampening effect may not be as strong as we might hope. Thus we should welcome the proposed changes and cross our fingers that the promises of extra lending to smaller businesses  actually take place as opposed to the falls seen so far.



Tags: bank of england; BoE; Funding for Lending; Mark Carney; FLS; , Help to Buy , housing market , lending , mortgages , savings rates
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