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Politics, more than need, drove UK bank FLS use
December 6, 2012 / 1:46 PM / 5 years ago

Politics, more than need, drove UK bank FLS use

* 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 use.

“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 the scheme.


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 GBP3.473bn respectively.

“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 Brussels.

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 February.

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