BOE Credit Plan Shows Signs of Cutting U.K. Funding Costs
The Bank of England’s credit- boosting plan is showing “early signs” of helping to lower bank funding costs, which may spur a gradual pickup in mortgage approvals and aid the U.K. economy, the central bank said.
“Easier access to credit” through the so-called Funding for Lending Scheme “should boost consumption and investment by households and businesses,” it said in an article in its Quarterly Bulletin, published in London today. “In turn, increased economic activity should raise incomes.”
The FLS, which began on Aug. 1, is intended to improve the flow of credit. Early signs have been “encouraging” and suggest the program is working as expected so far, though there are likely to be “sizeable” time lags until its effects are fully visible, according to the article.
Still, the attractiveness of using the FLS program has decreased as market funding costs fall. When the plan was announced on June 14, it would have been around 200 basis points cheaper than using other sources of secured wholesale finance, such as mortgage-backed securities or covered bonds, the Bank of England said. With the recent declines in wholesale costs, driven partly by the FLS, the scheme was likely to be around 100 basis points cheaper as of Nov. 26, the central bank said.
For some banks, “the relative attractiveness of the FLS would be reduced, the BOE said. It is still likely that for most banks the FLS provides an attractive source of funding,” it said.
The chapter in the bulletin was written by Rohan Churm and Amar Radia of the Monetary Assessment and Strategy Division, Jeremy Leake of the Financial Institutions Division, Sylaja Srinivasan of the Statistics and Regulatory Data Division and Richard Whisker of the Sterling Markets Division. In it, they said early signs from the FLS “have been encouraging, as funding costs for U.K. banks have fallen sharply.”
Bank of England policy makers introduced the FLS to help stimulate an economy struggling to recover from a recession. Its introduction coincided with some officials expressing doubts about the effectiveness of their bond-purchase program, which has reached 375 billion pounds ($607 billion).
Still, a separate article in the bulletin noted that the pickup in broad money growth during the latest round of quantitative easing, which finished at the end of October, “appear to indicate a positive effect of asset purchases.”
In a chapter on financial markets, the Bank of England said sentiment “showed signs of improvement” in recent months. This was partly because of the European Central Bank’s bond-buying pledge, which many contacts thought “had eliminated the risk of a disorderly unwind of euro-area imbalances in the short term.”
The chapter, which reviewed developments up to Nov. 26, added that tensions rose at the end of the period on concern that U.S. political negotiations aimed at avoiding the so-called fiscal cliff “may fail to produce an agreement on the speed and composition of deficit reduction.”
In a section on derivatives clearing, the BOE said new global rules will increase demand for “high-quality government bonds” that can be used as collateral. It said that “although significant uncertainties remain, estimates of the size of that additional demand are large.”
European Union and U.S. regulators are struggling to align rules for the $648 trillion market for over-the-counter derivatives, which became a target for tougher oversight after the 2008 collapse of Lehman Brothers Holdings Inc. Banks may have to meet minimum collateral rules for trades that aren’t centrally cleared as part of a push by global regulators to make the market safer.
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