Effective beginning 2014, the Bank of England will scale back the Funding for Lending Scheme (FLS), which was introduced on July 13, 2012, by removing funding supplied to banks for the purpose of stimulating mortgage lending. By doing so, it aims to refocus the program solely towards stimulating business loans for small firms.
The FLS program was originally designed to “[incentivize] banks and building societies to boost their lending to the UK real economy.” Participating banks may borrow UK Treasury Bills in exchange for eligible collateral, which consists of all collateral eligible in the Bank’s Discount Window Facility. According to the Bank, “[l]ending to smaller businesses in 2014 will continue to be encouraged by allowing banks to draw £5 in the scheme for every £1 of net lending to SMEs. The fee for all drawings from the FLS extension will be set at 25 basis points, which is the lowest point of the previous fee scale.”
The Bank’s governor, Mark Carney, stressed that while “the Funding for Lending scheme has contributed to the recovery by helping to improve credit conditions significantly,” the housing market, which had a near 7% increase in the past twelve months, is not an immediate risk to financial stability. Rather, he admitted, financial policymakers were concerned about the program’s effect on the bubbling housing market amid forecasts of a 10% increase in house prices next year, especially in conjunction with the Help to Buy program. By contrast, the credit market for small businesses, which the Bank believed to be important to the United Kingdom’s long-term financial stability, has not recovered. “Now the housing market is starting to pick up, it is right we focus the scheme’s firepower on small businesses. Small firms are the lifeblood of our economy,” said George Osborne, Chancellor of the Exchequer, in support of the withdrawal.
Critics of the withdrawal believed it could halt the housing market’s recovery, as it could drastically increase mortgage rates from its current low level. Certain subsectors of the housing market did not respond well to the news; the collective value of housing development firms dropped more than £1bn after Carney’s remarks on fears that the withdrawal would backfire. In particular, Barratt Developments, Persimmon, and Taylor Wimpey fell by more 6% after the announcement.
Some proponents of the withdrawal believed that it would help provide financial stability by shifting the focus away from speculative growth towards more tangible growth in business investments and exports. General Secretary of the Trades Union Congress Frances O’Grady said, “Ensuring that Funding for Lending works to boost business investment is a sensible policy that can drive sustainable growth and help build a new economy. But stopping over-excitement in the property market may hit the feel-good factor that the chancellor is hoping will distract from the failure of government policy to rebalance the economy.” Others questioned whether the withdrawal of the FLS would have a major impact on the housing market, as the removal of this policy will not have an effect on the Help to Buy program.