Nearly half of the FLS's funds were drawn down last quarter. Until Monday, the scheme, which has been running since September 2012, has been a damp squib, as UK banks, overflowing with liquidity, drew down token volumes or even paid back their FLS funds.
The scheme became a stick to beat the Bank of England with, as every quarter revealed another dismal set of figures.
No quarter, until now, saw more than £10bn of drawings, while one of the UK’s largest mortgage providers, HSBC, never even signed up. Even the government’s in-house bank, RBS, only took £750m, paying it back last quarter.
The banks never wanted to argue too strenuously against a scheme which let them borrow Treasury Bills at 0.25%, but were apt to insist that they were not lending because a lack of consumer or business demand, not because their underwriting conditions were too tight.
Funding for Lending acted on the funding costs of assets, allowing banks to borrow Bills at 0.25% against collateral, provided they were expanding their lending. But the banks all but ignored it. There were few borrowers at the sort of leverage the banks wanted.
The Bank of England also undercut FLS from the outset, by allowing banks to run down their liquid asset buffers from mid-2012. From 2009, the UK had the toughest liquidity regime in Europe, leaving UK banks stuffed with Gilts they did not want to hold. These could be sold and monetised to allow banks to extend mortgages — and selling unwanted Gilts was even cheaper than accessing FLS funds.
Leaving homes
But everything changed when UK consumers started wanting mortgages again, driven partly by the government’s announcement of the Help to Buy scheme in March 2013. Even customers with no intention of taking advantage of it could see that house prices would return to growth, and rushed to lever up and get into the market
Quarterly mortgage lending had bumbled along between £30bn and £40bn per quarter, according to figures from the Council of Mortgage Lending, but broke through this boundary to £42bn in Q2 2013, £49bn in Q3, and £51bn in Q4.
Banks reacted accordingly, and now, suddenly the FLS is a success. This illustrates what bankers around the sector have been saying since the crisis — that measures to support bank equity (Help to Buy effectively turns mortgages from 95% LTV to 75%) do much more than measures to support bank funding.
But this is also the last quarter of FLS in its current form. Banks may just be grabbing whatever funds they can at the last opportunity. The new version of the scheme is focused only on SME and business lending, applying a 10x multiple to new lending to these sectors.
Restriction to SMEs is probably a smart macro move — house prices are already well on their way, while business lending needs a push.
Whether the new scheme will help is another question. Some of the smaller banks, such as Aldermore, have built their businesses around FLS, but the big players are mostly out. Barclays, which has £12bn in FLS funding, is not even a part of the new scheme, while Santander and Nationwide (which, admittedly, have built their business around residential mortgages) have allowances of zero. Lloyds is the only big player in the scheme, and its £16bn allowance accounts for almost half of the total.
British small business still looks stuck in a deleveraging cycle. RBS reported new SME lending was up 2% from 2012, while SME current account balances are up 13%. Overdraft use dropped to 37% from 42% a year earlier.
Without eager borrowers, FLS will remain in the doldrums. Look forward to another damp squib next quarter.