Funding for Lending – the scheme run by the Bank of England which seeks to stimulate the economy by making cheaper loans available to firms and individuals – is fine as far as it goes. But we must be sure not to overstate its likely benefits. Those companies that would already qualify for a loan are likely to get cheaper rates, which is certainly a good thing for them. But the economic uncertainty caused by the Eurozone crisis is putting a lot of companies off borrowing at all, and they are unlikely to be swayed into applying by the scheme. For obvious reasons, those who currently don’t qualify for credit still won’t get it. The benefits of Funding for Lending are, therefore, very real. But they are likely to be limited to those companies that are already managing to borrow successfully.
Corin Taylor is senior economic adviser at the Institute of Directors, the professional business organisation.
In our view, the Funding for Lending Scheme appears to be a well thought-out framework, with a better chance of succeeding than some previous initiatives. However, we remain sceptical on whether the scheme will actually boost the volume of net lending to the real economy over the near term. Two of the four largest UK banks, RBS and Lloyds, will continue to deleverage as part of their transition plans, and banks in general have tightened underwriting standards. In any case, we expect consumer and corporate demand for credit to remain muted as long as macroeconomic uncertainty persists. Given that it represents a cheap, subsidised funding source, the scheme could also slow down further recovery in markets for alternative bank wholesale funding, such as mortgage-backed securities.
Dhruv Roy is an analyst in the financial institutions team at Standard and Poor’s.