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This week, the Bank of England has published utilisation data for the FLS or the Funding for Lending Scheme. Almost everyone agrees that this scheme has not worked quite the way it was expected to. However, it can also be seen differently.
Since the onset of the credit crisis, there have been several schemes doing the rounds. Among them, the FLS is the initial one targeting the lending towards the real economy, while incentivising banks and other building societies to increase their overall lending.
The data shows a strongly increasing list of associates in the FLS scheme. Last when counted, there are 35. The net lending by the FLS participants up until end September was 0.5bn GBP. The total amount of FLS drawdowns from the banks was 14.4bn GPB.
However, it is not surprising that media headlines remain focussed on the six biggest lenders. The conclusion is the overall lending for all the lenders in the period fell by 1.04bn GBP. Naturally, the question is why should this happen and what can be done to fine tune the scheme?
That the lending of the largest banks has fallen should not come as a surprise. This group has on board the Royal Bank of Scotland and the Lloyds Banking Group. Both of these banks are presently undergoing radical deleveraging and surgery. This is the first major reason their loan books are shrinking.
The second reason, as claimed by many analysts, is that the focus on lending is towards lower risk areas such as lower LTV mortgages in preference to areas, which need help such as the first-time buyers. To do something about this looks to be a difficult proposition. First, it must be known that FLS is a compromise, put together in a very short time, making it a tweaked Special Liquidity Scheme.
Obviously, the best thing to do would be to tweak the FLS further to make the incentives focus on the lending activities where they are needed the most. However simple that may seem to be, Europe imposes certain constraints that the Bank of England has to walk a tightrope to balance the needs of the market.
Therefore, focussing the FLS towards the first-time buyers will most certainly go against the rules of the European State Aid. This would also be seen as providing an unfair benefit over other countries.
That leaves the FLS doing its bit, as best as possible. However, more lenders are expected to join in the future.