RegionsUK’s Funding for Lending Scheme Seen as Improving Earlier Initiative

UK’s Funding for Lending Scheme Seen as Improving Earlier Initiative

Fitch Ratings said that the Bank of England’s (BoE) recently-announced funding for lending (FLS) scheme is expected to be tapped more extensively than the UK government’s previous attempt to boost lending through its government guaranteed small to medium sized enterprises (SMEs) scheme. The FLS is simpler, and contains strong incentives, although it does not address any capital constraints and the low demand for credit.

The FLS is designed to boost lending to households and businesses, and will open on 1 August for a period of 18 months. UK banks and building societies will be able to borrow UK treasury bills from the BoE, against collateral, for a period of up to four years. The fee that the BoE charges will rise if a bank does not maintain or increase its lending, thus providing a strong incentive for lenders to access the scheme said the credit ratings agency (CRA).

Fitch adds that the scheme is likely to provide a boost to lenders’ profitability because the banks are not required to pass on all the benefit to borrowers, and also because lenders are likely to release some of their excess, and expensive, liquidity.

The CRA said that it does not expect the tightening liquidity buffer to be a negative rating driver, as banks and building societies have improved their funding structure since the height of the 2008 financial crisis, reducing dependence on short-term wholesale markets and boosting core retail funds. Furthermore, the BoE recently introduced the extended collateral term repo facility to provide contingency liquidity.

Fitch noted that many UK companies, particularly SMEs, are not expecting growth, and demand for loans has remained subdued. The UK’s purchasing managers index for the manufacturing  sector currently stands at 48.6, up from a three-year low in May but still signalling falling demand as any reading below 50 indicates contraction. Furthermore, the housing and mortgage market remains under pressure, with price falls over recent years reducing the number of transactions.

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