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BoE would ‘grab’ 5% increase in lending from Govt scheme

Paul Fisher Bank of England Funding for lending

Bank of England executive director Paul Fisher says he would “grab” a 5 per cent increase in lending as a result of the Funding For Lending Scheme.

Under the scheme, over the next 18 months to the end of January 2014, the Bank of England will lend UK Treasury bills to lenders for up to four years for a 0.25 per cent fee per year, although this will increase by 0.25 per cent for each 1 per cent fall in net lending to a maximum of 1.5 per cent.

Lenders, which deposit collateral with the BoE as a security, can then use the Treasury bills to access money at “rates close to bank rate”, according to the Bank.

Each lender can access up to 5 per cent of its existing stock of loans to SMEs and households as at June 2012. Lenders are incentivised to boost lending because every pound of additional lending would be eligible for the scheme.

For example, a bank that had a stock of lending to SMEs and mortgage borrowers of £100bn in June 2012 but then lent a further £7bn by the end of 2013, would be eligible to borrow a total of £12bn under the scheme – the initial £5bn and £7bn in additional lending.

Fisher told MPs that the scheme would only be limited by the collateral banks can post, the capital they can lend and the number of businesses looking to borrow.

He said: “If we got lending growth of 5 per cent over the next 18 month period, that would equate to around £80bn. I would grab that now as an outcome of the scheme because we have had flat credit growth over the past three years, so that would be a considerable improvement.”

He added that almost 100 institutions were eligible for the scheme and that it would encourage people with expensive lending arrangements to seek cheaper deals with other banks.

Yesterday, Royal Bank of Scotland said it is cutting rates on on a fee-free five-year fixed rate deal at 90 per cent LTV from 6.49 per cent to 4.79 per cent as a result of the scheme.

Bank of England deputy governor Paul Tucker said: “The cost of bank funding has rocketed largely because of the dark cloud from the euroarea and what this scheme is doing is saying we will help put down the marginal cost of bank funding but in a scheme where you are encourage to pass it on.”

So far Barclays, Lloyds Banking Group, Royal Bank of Scotland and Nationwide Building Society have all confirmed they will take part in the scheme, while HSBC has ruled out joining the scheme at present and says it will continue to fund its lending largely through retail deposits, although it refused to rule out participating permanently.

Barclays intermediary channel director David Finlay says: “We will see an increase in activity in the coming months because of the scheme which will drive down the price of mortgages and we will reprice in line with any market movements. But, as a lender, we have no plans to move up the LTV curve or to change our acceptance criteria.”

Home Funding chief executive Tony Ward says: “This gives lenders a positive way of funding their business but they still have constraints on capital and liquidity so I cannot see lenders going mad and dropping rates to incredibly low levels and lending at higher LTVs, although rates might ease slightly.”

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