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.

-London newsroom: 00 44 20 7862 7491; e-mail: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]