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