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15 Saturday Dec 2012

Will funding really boost lending? Posted by:

A two-pronged approach from the Bank of England and the Government will see a vast amount of money made available to boost lending to individuals and businesses in an attempt to ward off a new phase of the credit crunch.

A ‘funding for lending’ scheme is being launched, worth up to £80bn, while the Bank will also pump up to £100bn of cheap credit into the UK economy over the next few months. These funds will come on top of the £325bn quantitative easing programme, while further QE may also be necessary. The sums are so vast as to be almost meaningless but what is important is that funds are being made available.

In a sense it is very bad news. If the Bank of England has to go to these lengths, then the situation must be dire. But in doing so it is hoped that it will see off a disaster before it happens. Banks face higher funding costs and the need to put more capital aside to meet their liabilities so the Bank is hoping that funding at low interest rates will help with these.

The question is: will it work? Of course, it’s too early to say for sure. The banks will have to apply for the funds and allocation will take time so we are unlikely to see the cash become available in the form of new mortgages and loans until towards the end of this year. Funding will be linked to bank lending performance so if they don’t lend, they won’t get the funds. That’s fair enough but much depends on who they intend to lend to.

If lenders make the money available to those with modest deposits, it should have a positive impact on the mortgage market. There are a finite number of borrowers with sizeable deposits anyway – lenders will probably have to go after those with smaller deposits if they are going to find enough customers. If they restrict lending only to those with sizeable deposits, these funds are going to make precious little difference.

Will it mean cheaper mortgage rates? Potentially. Swap rates – the rate banks pay to borrow from each other – fell considerably yesterday as the markets welcomed the news. Lenders, who have seen a rise in demand since Santander pulled back on the amount of lending it was prepared to do, may pass on lower rates to borrowers. It might mean that some won’t raise their standard variable rates when they might otherwise have done.

More money available for borrowers is to be welcomed. However, we wait to see exactly how the money will be allocated and therefore whether it will make a real difference to mortgage availability.