LONDON (MNI) – Before the launch of the Bank of England and
Treasury’s joint Funding for Lending Scheme Friday, analysts were
largely skeptical about its ability to boost lending and fuel the real
economy and after its unveiling they remain unconvinced.
The news that the UK’s largest banking group, HSBC, will not be
taking part in the FLS adds to doubts over its effectiveness. Larger
banks may find it cheaper to fund lending out of deposits and analysts
point out that the FLS, supposedly designed to get banks to increase
lending, provides them with the cheapest possible funding if they just
maintain it – suggesting the bar for success is being set low.
HSBC issued a polite “thanks, but no thanks” note on the FLS
Friday, highlighting the fact banks can get themselves favourable
publicity by showing they are not reliant on state subsidies.
“HSBC is predominantly funded by customer deposits and continues
to enjoy a very solid funding position, while making strong progress on
increasing lending to both businesses and consumers. HSBC will
therefore continue to fund its planned lending growth through its own
resources rather than accessing the Funding for Lending scheme,” it
said.
Philip Rush, economist at Nomura, points out that taking state
funding is a double-edged sword for banks.
“Use of previous state-sponsored schemes have been routinely
encouraged then thrown back in the face of participating institutions as
demonstrating the tax-payer subsidy they benefit from,” Rush says in a
note, adding that other banks may follow HSBC’s lead.
The amounts involved in the FLS are, potentially, large with banks
able to access up to 5% of their stock of existing lending, currently
some Stg80 billion or near 6% of GDP, and more on a pound-for-pound
basis if they expand lending.
The scheme opens its doors on August 1 and will run for 18
months, offering banks Treasury Bills against a wide range of collateral
with large haircuts. The minimal fee is just 25 basis points,
pushing the cost of funding through the scheme well below market rates.
For the BOE and Treasury, the thinking seems to be based on smooth
demand curves. The cost of funding goes down, feeding through to cheaper
lending which boosts loan demand.
Economists doubt whether it will work quite so smoothly in
practice. The BOE’s own consumer credit data shows little pent-up demand
for lending and its June agents report states “many firms remained
focused on paying down existing debt.”
Ross Walker, UK economist at RBS, says in a note that his key
concern is that demand for funding to finance investment is tepid.
UK companies are already sitting on piles of cash, Stg754 billion
in cash and liquid assets is the figure quoted by Walker, and yet
capital expenditure growth is weak.
As companies already have cash and are not investing, the offer of
cut price loans may make little difference.
Nevertheless, the BOE is strongly committed to transparency over
the results of the scheme, although the impact on lending will be
subject to the usual arguments over counterfactuals. If the euro area
takes yet another turn for the worse, and bank lending holds steady,
the BOE could argue it would have fallen without the FLS.
With so much uncertainty over its impact, the FLS is likely to have
a muted impact at most on the total amount of quantitative easing the
BOE’s Monetary Policy Committee sanctions.
The Treasury, in any event, sees it as a complement and not a
substitute to the BOE’s stimulus.
“The FLS will support the flow of credit to where it is needed,
complementing the MPC’s asset purchase programme in easing monetary
policy conditions,” Chancellor of the Exchequer George Osborne said in
an open letter to BOE Governor Mervyn King.
-London newsroom: +44 207 862 7491 email:
drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$]
