* Large banks already extremely liquid ahead of FLS scheme
* Round numbers suggest banks keen to promote involvement
* Few sign of impact on lending to real economy yet
By Owen Sanderson
LONDON, Dec 6 (IFR) - Results from the first quarter of the
Funding for Lending Scheme show UK banks took just GBP4.36bn,
with the round numbers suggesting political pressure, rather
than funding needs, determined how much the scheme was used.
"It looks like the big five used FLS out of courtesy - the
numbers are too round to reflect real need, and these
institutions are extremely well funded," said Rob Ford,
portfolio manager at TwentyFour Asset Management.
Barclays, Lloyds and Santander took GBP1bn each, while RBS
took an equally exact GBP750m. HSBC, the other large bank in the
UK, did not even go this far, declaring at the announcement of
the scheme that it would not be taking part.
One senior UK banker admitted "moral suasion" was used to
ensure his institution's participation in the FLS.
Nationwide and Leeds Building Society accounted for the
remaining volume, taking GBP510m and GBP100m respectively.
The head of securitisation at one UK lender said that though
these volumes were round numbers, they represented very
different percentages of each institution's mortgage book, and
this initial volume was unlikely to be indicative of total FLS
"I think you'll see a much stronger pattern emerge in the
next set of data," he said. "Really this scheme has only been
operating for six weeks, and that is far too little time to turn
around a large institution's liquidity approach."
Lloyds has already stated that it will take a further GBP2bn
from the scheme by the end of December, with at least one other
large bank also likely to boost drawings in the next phase of
CONDITIONS NOT VOLUME
Although the design of the scheme is supposed to boost real
economy lending volumes (by pegging the price of T-bill loans
according to whether lending is expanding), the Bank of
England's figures show limited effects on volumes so far.
The banks took GBP4.36bn in T-bills from the scheme, net
lending increased just GBP496m. Barclays boosted net lending by
GBP3.8bn and Nationwide by GBP1.834bn (the measures used strip
out portfolio purchases, so Barclays purchasing ING Direct's
GBP5.6bn UK mortgage book, for example, will make no difference
to the figures).
However, Lloyds, RBS and Santander continued to shrink net
lending to the real economy, by GBP2.7bn, GBP642m, and
"Cause and effect from FLS to more real economy lending
doesn't seem to have happened yet," said Andrew Lennox, ABS
portfolio manager at ECM.
ABS strategists from JP Morgan point to the Bank of England
credit conditions survey, which suggests some success from the
scheme. The net balance of firms reporting an actual increase in
mortgage availability is +22%, the highest since the survey
began in 2007.
Figures from the Bank's "Trends in Lending" show little
impact on mortgage pricing to the end of October, but as the
publication acknowledges "the FLS might first begin to impact on
secured lending volumes and data towards the end of 2012."
It should come as little surprise that UK institutions have
not rushed to take on extra liquidity.
Huge buybacks from Lloyds, RBS and Barclays this autumn
suggest these banks had excess liquidity on hand, and prefer to
use it to boost net interest margin through liability
managements, rather than to push out to the UK real economy at
historically low spreads.
"The big UK institutions have spent the last four years
working out their funding strategy, to the point where they have
plenty of term liquidity on hand," said Ford.
"In some ways it's a bit of a shame that it took until now
for the Bank of England to offer them a term liquidity facility,
when they no longer need it as much as they did three or four
years ago, although I think it has definitely helped to drive
the general cost of funding down which is a good thing."
Santander UK, which has not bought back debt, increased
liquid assets 21% in the first nine months of the year, with
core liquid assets standing at GBP40bn at the end of September -
164% of Santander's short-term wholesale funding requirement.
Rating agency actions also prompted a cash build-up this
year, with UK institutions building up reserves ahead of Moody's
downgrades which could have seen large collateral posting
requirements. Lloyds had was said to have GBP24bn of excess
liquidity ahead of the Moody's review, while RBS was running a
liquidity buffer of 2.5 times its short term borrowing - and
looking to reduce this through its liability management.
Other institutions may be looking at FLS as a strategic
source of funding to boost marginal business - for example, to
fund new buy-to-let originations, while maintaining a prime
owner-occupied mortgage business backed by deposits.
Funding for Lending has been partly credited with fuelling
the huge rally in UK prime RMBS through the summer months - more
than 100bp DM, with some recent vintage bonds trading over 103.
But market observers unconvinced that FLS has actually
changed issuance plans much, given the big banks' strong
liquidity positions at the start of the scheme.
Leeds Building Society decided to retain its debut Albion
No. 1 RMBS over the summer, having initially sounded investors
about a possible deal during the Global ABS conference in
But the larger institutions had already dampened issuance
expectations for the year - Lloyds said it was funded for 2012
after the first quarter, and took EUR13bn from the LTRO. It has
not done an RMBS deal since Arkle 2012-1 at the beginning of