Funding for Lending – 2 lessons and a question
Today the Bank of England has released the first tranche of data on the effectiveness, or otherwise, of the Funding for Lending Scheme.
The scheme provided cheap funding to banks in order to encourage them to grow net lending. The interest rate offered drops as the banks lend more.
As the Bank explains this scheme (the FLS):
The FLS aims to encourage more lending to the UK economy than would have been the case in the absence of the scheme. At an aggregate level, prior to the launch of the FLS in July 2012, Bank staff judged that UK bank lending was more likely to decline than increase over the subsequent 18 months. Some banks are reducing parts of their lending activities, consistent with the continued adjustment of their business models in the wake of the financial crisis, or responding to State Aid conditions. While such adjustments should continue, the FLS should encourage those banks that were planning to reduce their lending to households and companies in aggregate to expand their core lending such that the total is cut back by less than would otherwise have been the case.
The Bank’s Paul Fisher explained much of the reasoning behind the scheme back in September.
I’ve warned previously that there are three potential problems with the FLS – firstly it might not actually boost net lending, secondly in the final analysis the success of otherwise of the scheme will depend on the behaviour of the big banks and finally it provided no control as to where the net lending actually goes.
So what do today’s data show?
The table below gives details by bank.
As can be seen the headline figures are that net lending has grown by £0.5bn since June, whilst draw downs from the Scheme are running at £4.4bn. So £4.4bn of cheap funding has only boosted net lending by £0.5bn.
Of course it is hard to judge what difference the Scheme has made – it may be that case that in it;s absence net lending would be down by almost £5bn. Or it may be that it’s absence net lending would still be £0.5bn and there is a large dead-weight loss.
Comparing the data above to the drawn down data, it seems there is so far little link between net lending increases and draw downs. Santander, RBS and Lloyds have drawn down a collective £2.75bn and yet their net lending has fallen (against though it is possible that without the FLS their lending would have fallen further).
For me there are two key things to learn from the data above and one key question.
The first lesson is that net lending has grown by just 0.036% in the first quarter of the scheme despite £4.4bn of support. This isn’t a good result and suggest a serious weakness of credit.
The second lesson is that the success of the scheme really will depend on the co-operation of the big banks. between them Lloyds, RBS, Santander and barclays (HSBC is not part of the scheme) 75% of the total loan stock of participating banks. In the final analysis it will be those banks that make the difference to loan growth.
The big question though is exactly what kind of lending is growing? The Bank data doesn’t distinguish between lending to business and lending to households. Other data suggests that lending to business is still falling. It may well be the case that lending for mortgages is growing at a weak pace whilst lending to firms continues to contract.
Other all it is too early to judge the FLS on one quarter’s numbers but the early indications aren’t reassuring.
Afternoon Update: On a few hours reflection, I’m starting to wonder if I haven’t been blinded by numbers. The Bank has published the net lending figures for the 40 or so banks signed up to the FLS and this shows an increase of £0.5bn in net lending. But only 6 banks have actually used the Scheme so far and their net lending has fallen by £1bn.
Maybe the best way to look at these numbers isn’t to say, as I did, that £4.4bn of support has fed through into net lending of £0.5bn, but that support of £4.4bn has fed through into a fall in net lending of £1bn?
If so, that is very worrying indeed.