–Adds FSA Turner On Liquidity To Version Transmitted At 1232 GMT

LONDON (MNI) – Bank of England Executive Director Markets Paul
Fisher hit back at criticism that the BOE’s Funding for Lending Scheme
will prove ineffective due to low demand and that banks will not pass on
their lower funding costs to borrowers.

The FLS, which offers banks below market rate funding in return for
them boosting lending, was launched last week to widespread skepticism
among analysts that there would be strong demand for fresh bank lending.
Fisher, appearing before the Treasury Select Committee, claimed demand
was simply a function of the price of lending and banks would lower the
price of loans.

“We have had a lot of contacts since putting out the details (of
the FLS),” Fisher said, when asked whether banks were interested.

He said the BOE had devised the scheme, in conjunction with the
Treasury, to take account of the fact that some of the major UK banks
were contracting while others were expanding.

“We tried to find a price schedule which would apply to everybody,
which gives incentives to both the deleveraging banks and the expanding
banks to lend more,” Fisher said.

“What we are trying to do is get a more virtuous circle going. The
more confidence in the economy and growth we get the better credit
prospects will be,” Fisher said.

“At a time when we kept interest rates very low .. some of those
lending rates have actually been going up and credit growth over the
last few years has been pretty static, at best So we are trying to get
more growth into credit,” he said.

Asked about the weakness of demand for credit, Fisher replied,
“the demand depends on the price at which the credit is offered.”

Concerns have been raised that banks will simply widen their profit
margins rather than cut lending rates.

Fisher said, however, that what banks “will traditionally do is
have a target margin to lend over their borrowing rate … and, usually,
they will slowly adjust their lending rate in relation to their funding
cost.”

King also told the committee the FLS gives banks strong incentives
to lend.

In other comments Fisher was asked about preparations for exiting
from quantitative easing.

“I think we have done a considerable amount of preparation over QE
exit,” he said

Back in 2010 “we had a range of options for exiting QE. We came up
with some plans. Those plans depend in part on how quickly we need to
unravel QE,” he added.

Fisher said the BOE needed to look again at these plans as the
amount of assets the BOE has bought through QE is now much larger.

The FLS is one of a raft of interlocking initiatives being promoted
by the UK authorities to get credit flowing.

Another part of the jigsaw is to allow banks to run down liquidity
buffers in times of stress to keep lending flowing. Under the FLS banks
will be able to get T-bills against collateral pre-positioned at the
BOE, and this could just bolster liquidity buffers.

Financial Services Authority Chairman Adair Turner said that in the
next few weeks the FSA will go bank by bank delivering guidance on
liquidity buffers.

“We are still working on the details of how to do this because
it is a very complicated issue,” Turner said.

He said the problem with changing liquidity buffers is “If you do
it in a particular way you create some funny, unintended consequences in
terms of the incentives to use the Funding for Lending Scheme.”

The FSA will soon hold a collective meeting with banks on the
issue, and he was confident the banks would be able to get the liquidity
they need in times of market stress.

“They now have a very significant amounts of pre-positioned
collateral at the Bank of England which they could use to get liquidity
in stressed circumstances,” Turner said.

“Within a few weeks we will have sorted this out,” he added.

UK banks have built up their loss absorbing capital cushions and
with the BOE offering extra liquidity if needed, Turner believes the
banks are well placed to increase lending.

“The UK banks have built very significant capital buffers over the
last two or three years,” Turner said

“But for those extra capital buffers we would be having less
lending to the real economy now because there would be greater concerns
about their credit worthiness,” he added.

-London newsroom: 00 44 20 7862 7491; e-mail: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$]