Funding for Lending: a Panacea?

Image: George Osborne - Conservative Party

Image: George Osborne - Conservative Party

In his Mansion House speech on 14 June, chancellor George Osborne announced a £100bn new government programme called ‘Funding for Lending’.  The theory goes that by cutting banks’ funding costs – in exchange for more extensive lending commitments – lenders will become more active and that competition in the marketplace will drive the cost of borrowing down.  The Treasury goes as far to say that the new scheme could support up to £80bn in new mortgage loans.

It comes at a time when it’s widely accepted that banks are seeing higher costs of funding mortgages – which is influenced by the costs of attracting funds from savers, the price of funding from the wholesale money markets and also the amount of capital that banks are required to hold against their loans.  With ongoing instability in the Eurozone, the higher price of funding on the money markets is the primary contributor to increased costs and on the whole, banks are reluctant to expand their loan books while the future of the Eurozone is so turbulent and as a result lenders such as RBS, Halifax and now the Co-op have begun to increase their SVRs.

It’s not a situation that’s likely to improve quickly; in the Bank of England’s latest credit conditions survey, lenders have warned that the number of new loans that they’re able to grant in Q3 may fall even further on the back of the reported reduction in available mortgage credit.

This is compounded by the fact that even though the Basel III requirements for holding a higher ratio of capital against outstanding loans doesn’t come into effect until 2019, regulators are pressing lenders to build a buffer of 17% well ahead of the implementation date.

With this backdrop, it’s perhaps not surprising that net mortgage lending dropped from £1.05bn in April to £563m in May – the lowest level since September 2011.

Despite Osborne’s Funding for Lending being a welcome step in the right direction, commentators are already questioning whether the scheme is of a sufficiently large scale to really have an impact…


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