The Bank of England today announced details of the Funding for Lending Scheme (FLS), first flagged by the Governor of the Bank of England and Chancellor in their Mansion House speeches of 14th June.
The scheme has been launched against a background of rising lending rates and falling lending quantities, and lenders’ expectations that rates will rise further. The objective is to increase the volume of lending to non-financial businesses and households (including mortgages) and to lower interest rates. It will open on 1st August 2012 and will run till 31st January 2014.
Home builders should benefit from the scheme both through lending to businesses, as well as increased availability of mortgage funds, hopefully at lower cost.
The scheme “is designed to boost lending to the real economy”. Because it is about macro-economic intervention, it does not attempt to favour any one sector or loan type. So for example, there is no attempt to link it to NewBuy.
Banks and building societies are eligible to participate. While there is no published list of eligible participants, it seems reasonable to assume all the major mortgage lenders will be eligible. The Bank talks about “as many institutions are possible”. Funds will be lent to banks and building societies for 4 years.
There are two parts to the potential volume of funds. Lenders will be able to borrow:
up to 5% of the value of their stock of existing lending to the real economy;
and £1 for every £1 they expand their net lending (between June 2012 and December 2013).
The Bank describes these as “strong incentives to boost lending”. There is no upper limit to individual or aggregate funding. 5% of the current stock of existing loans is roughly equivalent to £80bn. (For reference, net mortgage lending in the UK expanded by £9.3bn in 2011, compared with peaks of £110bn in 2006 and 2007.)
Banks that lend more will be able to borrow more, and do so at a low cost. However the price of funds to lenders will rise if their net lending falls. The “fee” lenders will be charged will ensure that, for those expanding their net lending, their funding costs will be less than the banks would have had to pay in the market. For example, a bank that has expanded its net lending could fund new lending at a cost of roughly Bank Rate (0.5%) plus 0.25%, described by the Bank as “much lower than current market term funding rates, even for the strongest banks”.
There is not mention of any target split between business and household lending. This will presumably depend on the lending decisions of the lenders. However the Bank and Treasury are setting up an Oversight Board which will meet quarterly to monitor the success of the scheme. The Bank will publish quarterly results for the scheme in aggregate – the amounts lent to households and firms - and by each participating institution.
Although the scheme will not target specific types of lending, such as NewBuy, we must hope the FLS will help reduce NewBuy rates by lowering the cost of funds to lenders.
The FLS should help increase net mortgage lending in aggregate, which should help house builders through increased mortgage availability, and hopefully some easing in mortgage rates, for their own customers, as well as by improving activity in the wider housing market.
House builders should also benefit from some easing in the availability and cost of business finance.
John Stewart Director of Economic Affairs
Home Builders Federation
London, SE1 9PL
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