LONDON (MNI) – The Bank of England is set to unveil the details of
the Funding for Lending scheme Friday, with analysts questioning just
how much demand there is going to be for it.

The Friday launch suggests the central bank is confident there are
no problems with the FfL scheme on state aid grounds and that UK banks,
whose top executivess have been briefed on it, have no fundamental
objections to the idea. The big unknown, however, is how much pent-up
demand there really is for fresh bank lending.

The broad details of the FfL scheme are known. The BOE will lend
against collateral, with haircuts imposed, and the funding rate will
decline in proportion to the amount of extra net lending the banks
undertake.

The ultimate aim, as BOE Chief Economist Spencer Dale said, is “to
improve the flow of credit to households and companies that are
restricted to bank credit as their primary form of borrowing.”

BOE Governor Mervyn King said in evidence to the Treasury Select
Committe on June 26 the BOE would only proceed with the FfL if it was
clear the European Commission had no objections to it.

“We have to have confidential discussions with the European
Commission to see whether questions of state aid arise. I am pretty
confident that they will not, but that is something we need to discuss
with it first, before we make public the terms of the scheme,” he said.

He added that he hoped the FfL “would take immediate effect”, so if
things have gone to plan Friday will be a “live launch” for the FfL.

While the scheme should ensure plenty of cheap funding for banks,
analysts question how great the effect on lending will be.

George Buckley, chief UK economist at Deutsche Bank, says the key
uncertainty is “we don’t know what the take-up is going to be.”

With quantitative easing, everyone knows exactly how fast the money
is flowing into the economy, with the BOE paying whatever price is
needed to buy Stg1 billion of gilts in three weekly auctions.

The banks themselves, and the BOE itself, however, do not have
detailed information on how many customers will actually borrow if
lending rates are lowered.

As Buckley points out, the BOE’s own credit conditions survey only
asks lenders questions about rises and falls in demand, and not whether
demand would increase if, say, lending rates were cut by 100 basis
points.

The BOE’s own agents report and the credit conditions survey have
also found little clear evidence of pent-up credit demand.

The latest credit conditions survey found that while lenders
reported that demand for credit from small companies had risen in the
three months to end-May, demand from medium-sized firms was unchanged
and demand from large companies fell.

While the FfL scheme should serve SMEs best the credit conditions
survey said that over the next three months “demand was expected to be
unchanged for small firms and to increase for medium-sized firms.”

MPC members have made clear they will factor in the likely impact
of FfL into their decisions on the amount of extra QE they believe is
necessary.

While some immediate impact of the BOE’s liquidity and credit
easing initiatives has already shown up, in falls in Libor rates and
spreads after the initial announcement, the publication of the details
will not remove the uncertainty surrounding the impact of the scheme.

The key features of the FfL will hit screens at 1000 GMT Friday,
with the BOE publishing all the detail on its website at the same time.

– London newsroom: 00 44 20 7862 7491; drobinson@marketnews.com
[TOPICS: M$$BE$]