Some thoughts to bear in mind before digging a grave for the Funding for Lending Scheme

FFS, FLS!

Six months into the Bank of England’s Funding for Lending Scheme (FLS), and we seem eager to anticipate its demise, like wolves padding after a limping bison.

The scheme, which offers banks funding at a discounted rate of interest so long as those lower rates are passed on to customers, has so far seen £13.8bn drawn from the Bank’s pot of £100bn, of which £9.5bn was accessed in last year’s final quarter.

The problem was, Q4 also saw overall bank lending drop by £2.4bn compared to the previous three months.

Oh those naughty, naughty banks. Lloyds Banking Group, RBS and Santander cut their lending totals by a combined £7.6bn during the quarter, despite drawing down £4.8bn between them through the scheme, while Barclays, despite growing lending during Q4, did so by only £5.7bn while drawing down £6bn.  

Of course, if banking was simple, we’d expect lenders to have squirted money into the hands of consumers and small business owners with wild abandon, in exactly the quantities drawn down.

But then, despite all our desires to the contrary, banking isn’t particularly simple. Here’s some thoughts to bear in mind before digging the FLS’ grave early.

First, as the Bank has already pointed out, the fourth quarter is never the strongest time for lending in the first place, and we would have been worse off without the boost of the FLS

Second, we shouldn’t forget the wider context, of major banks being mandated to shore up their capital bases in order to avoid being as exposed to ruin as they were in 2008. Unfortunately, the main way for them to do this is by cutting back on lending.

Third, there is a time delay on the reduced cost of funding offered by the scheme trickling through to customers, as it takes time for loans to make it through from application to payout. This has now been stated by the Bank often enough to feel a tiny bit “dog ate my homework”, but is still a fair point.

All things considered, I’m surprised people’s expectations were so high. Even before launching the scheme, the Bank predicted that we’d have to get some way into 2013 before we saw the real benefits of the scheme.

And before we expect miracles, let’s remember the fundamental obstacle facing the scheme: it can’t do anything at all about the cost of risk, i.e. what banks have to put aside in contingency for loan defaults.

Very small businesses, very new ones, and those in sectors considered by lenders to be on the ropes, will still have great difficulty being touched with a bargepole while the discounted funding can be channelled into lending to safe bets.

And who can blame the banks? We’ve spent five years pillorying them over subprime lending, so is it really a surprise they are so risk averse now? By demanding that banks pile more money into the SME sector, we are explicitly asking them to take greater risks.

So let’s give Threadneedle Street the benefit of the doubt and have this whole conversation again after Q1. If the scheme isn’t working, replacement isn’t out of the question - after all, the FLS was created to replace the underwhelming National Loan Guarantee scheme, which was quietly phased out after only six disappointing months.  

But let’s also revise down our expectations of what will constitute success for the FLS. If used correctly it will be able to soothe the symptoms of a deeply troubled system, but it’s never going to touch the roots of the problem.

Bank of England. Photograph: Getty Images

By day, Fred Crawley is editor of Credit Today and Insolvency Today. By night, he reviews graphic novels for the New Statesman.

Photo: Getty
Show Hide image

Theresa May could live to regret not putting Article 50 to a vote sooner

Today's Morning Call.

Theresa May will reveal her plan to Parliament, Downing Street has confirmed. They will seek to amend Labour's motion on Article 50 adding a note of support for the principle of triggering Article 50 by March 2017, in a bid to flush out the diehard Remainers.

Has the PM retreated under heavy fire or pulled off a clever gambit to take the wind out of Labour's sails while keeping her Brexit deal close to her chest? 

Well, as ever, you pays your money and you makes your choice. "May forced to reveal Brexit plan to head off Tory revolt" is the Guardian's splash. "PM caves in on plans for Brexit" is the i's take. "May goes into battle for Brexit" is the Telegraph's, while Ukip's Pravda aka the Express goes for "MPs to vote on EU exit today".

Who's right? Well, it's a bit of both. That the government has only conceded to reveal "a plan" might mean further banalities on a par with the PM's one-liner yesterday that she was seeking a "red white and blue Brexit" ie a special British deal. And they've been aided by a rare error by Labour's new star signing Keir Starmer. Hindsight is 20:20, but if he'd demanded a full-blown white paper the government would be in a trickier spot now. 

But make no mistake: the PM didn't want to be here. It's worth noting that if she had submitted Article 50 to a parliamentary vote at the start of the parliamentary year, when Labour's frontbench was still cobbled together from scotch-tape and Paul Flynn and the only opposition MP seemed to be Nicky Morgan, she'd have passed it by now - or, better still for the Tory party, she'd be in possession of a perfect excuse to reestablish the Conservative majority in the House of Lords. May's caution made her PM while her more reckless colleagues detonated - but she may have cause to regret her caution over the coming months and years.

PANNICK! AT THE SUPREME COURT

David Pannick, Gina Miller's barrister, has told the Supreme Court that it would be "quite extraordinary" if the government's case were upheld, as it would mean ministers could use prerogative powers to reduce a swathe of rights without parliamentary appeal. The case hinges on the question of whether or not triggering Article 50 represents a loss of rights, something only the legislature can do.  Jane Croft has the details in the FT 

SOMETHING OF A GAMBLE

Ministers are contemplating doing a deal with Nicola Sturgeon that would allow her to hold a second independence referendum, but only after Brexit is completed, Lindsay McIntosh reports in the Times. The right to hold a referendum is a reserved power. 

A BURKISH MOVE

Angela Merkel told a cheering crowd at the CDU conference that, where possible, the full-face veil should be banned in Germany. Although the remarks are being widely reported in the British press as a "U-Turn", Merkel has previously said the face veil is incompatible with integration and has called from them to be banned "where possible". In a boost for the Chancellor, Merkel was re-elected as party chairman with 89.5 per cent of the vote. Stefan Wagstyl has the story in the FT.

SOMEWHERE A CLOCK IS TICKING

Michael Barnier, the EU's chief Brexit negotiator, has reminded the United Kingdom that they will have just 15 to 18 months to negotiate the terms of exit when Article 50 is triggered, as the remaining time will be needed for the deal to secure legislative appeal.

LEN'S LAST STAND?

Len McCluskey has quit as general secretary of Unite in order to run for a third term, triggering a power struggle with big consequences for the Labour party. Though he starts as the frontrunner, he is more vulnerable now than he was in 2013. I write on his chances and possible opposition here.

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Emad asks if One Night Stand provides the most compelling account of sex and relationships in video games yet.

MUST READS

Theresa May is becoming adept at avoiding defeats says George

Liv Constable-Maxwell on what the Supreme Court protesters want

Theresa May risks becoming an accidental Europe wrecker, says Rafael Behr

Get Morning Call in your inbox every weekday - sign up for free here.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.