24 Apr 2013

Is souped-up scheme a shot in the arm for lending?

“On steroids” was the description applied by Deputy Prime Minister Nick Clegg to the new souped-up “supercharged” Bank of England Funding for Lending Scheme (FLS).

Talking to those behind the scheme, I would suggest, at best, that it is on caffeine, perhaps ProPlus.

There are three interesting changes being made to the scheme launched last summer, which has succeeded in cutting funding costs for banks, borrowing costs for good credits, and failed to increase small business lending.

First, it will be extended by a year.

Second, it will contain strong incentives to increase greatly lending to SMEs (defined as annual turnover under £25m). Some £10 of subsidised funding will be available for every £1 of additional SME lending this year. Next year this falls to a still generous £5.

Third, some non banks such as leasing companies will gain access to the FLS.

Nothing to complain about here. All sensible stuff. It might still be argued that this should have been done two or three years ago. Clearly it is an implicit admission that four waves of coalition efforts to boost business lending from relying on low gilt rates, to Project Merlin, to the National Loan Guarantee Scheme, to FLS 1.0, have failed to have the desired effect.

Furthermore, the Bank of England now does privately acknowledge that the scheme has coincided with a notable fall in savings rates as banks no longer have to rely on ordinary funding from ordinary Britons.

Also, it seems as if the Bank feels that its impact will only be at the margins. It appears to see the scheme as more of an insurance policy against a sharp rise in SME loan rates – as experienced during euro crisis flare-ups – rather than something that will lower current rates further. Hardly an anabolic stimulant, perhaps more like a double espresso.

I do detect something interesting from the Treasury approach to this. The Treasury sees this scheme as a stimulus. It knows there is a need to be seen to stimulate the economy. A cynic might question the timing, the day before we expect another round of disappointing GDP figures. The Treasury will argue that this is entirely in keeping with its Plan A strategy of fiscal conservatism and monetary activism

Even more intriguing is something I discovered and confirmed with the Bank of England. One of the extensions announced today will be the incorporation into the scheme of previously barred “specialist lenders” in the mortgage market.

This is a euphemism for specialist buy-to-let (BTL) and high loan-to-value lending units of banks, but also stand-alone companies. I presume this means that companies such as Paragon and Precise will now be in receipt of central bank subsidised funding to lend to landlords.

Support for BTL was specifically excluded from the Treasury’s Help to Buy scheme, because it was seen as controversial to use taxpayer backing to support landlord’s speculative home hoarding.

Is this not the case for the Bank of England too? It is clear that a sweep of banks have relaunched or greatly expanded their BTL offering on the back of FLS 1.0. The very cheapest (interest only) mortgages are now solely available to landlords.

The Bank claims it should not be making normative judgements about where to lend into the economy, that is for commercial banks. But its subsidy for SMEs is a normative judgement (and the FT’s Chris Giles points out that today’s other extension to “unincorporated SMEs”, could see a further expansion to cottage landlord businesses).

At one level, neither the Treasury nor the Bank of England should really attempt to justify the FLS on the basis of helping “first time buyers” and small businesses, when the reality is that much of the subsidy is ending up helping augment landlords property portfolios. Or if they do, please can we have the numbers on Buy to Let?

At a bigger level, the taxpayer-backed incentive to housing financialisation and speculation, and the disincentive to save appears to be the absolute opposite of the Coalition’s much-vaunted “rebalancing”.

There was a sniff of this around “Help To Buy”. The housing market seems to be being primed for a “beautifully” timed 2014/15 credit bonanza, that will sustain house prices.

The economic opiate of a house price stimulus for a chancellor near an election seems to remain as strong as ever in a coalition committed to rebalancing.

In which case this is not economic policy on steroids. It is economic policy on smack.

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