So much for Funding for Lending stimulating bank lending in the UK

This week I have been examining aspects of the UK economy and the central theme of this is that our  economy is going to continue to struggle if wage growth remains so weak. This is because it has fallen well below the level of annual inflation meaning that in real (inflation adjusted) terms we overall have less income which has obvious implications for likely spending levels. Thus domestic demand will be weakened by this and if we add in that individuals are also deleveraging mostly by repaying debt the outlook for domestic demand does not look bright.

The official policy response has been to reduce official interest-rates to 0.5% and then to undertake a range of monetary stimulus programmes such as Quantitative Easing and the more recent Funding for Lending Scheme. These are officially described as operations designed to reduce longer-term interest rates and encourage bank lending to stimulate the economy. I however have regularly pointed out that these stimulus plans have as their clearest effect operated as a boost for bank profitability. However the official view has been that such policies will boost the economy via stimulating credit in spite of “surprises” and unintended consequences such as their effect on inflation contributing to a fall in the level of real wages of around 8% so far.

How is the policy doing?

The Bank of England has issued its latest report on Trends in Lending in the UK this morning and its opening salvo must have been very uncomfortable for itself.

 The annual rate of growth in the stock of lending to UK businesses was negative in the three months to February.

We are getting rather used to unfulfilled promises in this area are we not? In fact it gets worse.

The stock of lending to both small and medium-sized enterprises and large businesses also contracted over this period.

Indeed the most hopeful part was this bit.

The annual rate of growth in the stock of secured lending to individuals was broadly unchanged.

I read the last part with a wry smile as I have been arguing that the mortgage situation was not living up to the official hype for a while but as ever there were plenty happy to back the official line and tell me that I was wrong. Indeed prospects look none too good either.

Mortgage approvals by all UK-resident mortgage lenders for house purchase fell slightly in the three months to February

Remember also that we were promised that all this easing would lead to lower borrowing costs  for industry and individuals?

The Bank’s measure of the effective interest rate on new borrowing for businesses was broadly unchanged in the three months to February.

That phrase “broadly unchanged” seems to be popping up a bit does it not? As I wonder if it should find its way into my financial lexicon for these times. Also those concerned about the small and medium sized business sector (SME) will be alarmed by this bit.

In the survey, net balances of small and medium-sized firms reported some increase in costs over the same period,

Yet again we find ourselves observing that up is the new down!

Actually the chart showing borrowing costs for the smallest companies shows a sharp rise to nearly 5% as we moved into 2013.

Remember the promises of the Funding for Lending Scheme?

What does it actually do?

The FLS offers banks a cheap source of funding

What were we told would happen as a consequence?

Together, lower overall bank funding costs should allow banks to increase the availability of credit by cutting loan rates or easing other, non-price terms. The resultant increase in lending should be associated with higher consumption and investment spending.

The emphasis is mine to illustrate the gap between what we were promised and reality. Although “should allow” gave something of a get out clause the phrase “resultant increase in lending” looks hollow now.

Where did it all go wrong?

We see that one more time cash goes into our banking sector and in the manner of the South Park episode “It’s Gone” it then fails to emerge into the outside economy. Let us take a look at the original promise again.

the FLS boosts banks’ incentives to lend by making both the amount and price of funding available to banks conditional on their lending to the UK real economy

Now if we move from fantasy to reality we can observe that the Lloyds Banking Group has drawn some £3 billion of cheap FLS funding in return for reducing its lending by some £5.6 billion! I think everyone can spot the flaw. It gets worse as overall FLS had provided some £13.8 billion of cheap lending in the second half of 2012 in return for lending falling by £1.5 billion and today’s report suggests that 2013 was no better and may in fact be even worse.


We find ourselves in a familiar situation where a monetary stimulus programme in fact appears to have turned into a bank profitability stimulus programme. The worst part of this is that we have replicated one of the failures of the Japanese experience. You see the Bank of Japan tried this sort of policy and what happened was banks begged large relatively low risk companies to borrow and did nothing for smaller business who were supposed to be the objective. Spot the difference here from the Bank of England’s Agents Report.

The survey showed that for large firms,(1)there had been an improvement in credit availability compared with a year earlier…..while among the small firms surveyed, slight net balances reported a deterioration in the availability and cost of borrowing

Remember large firms have cash balances overall so the point of improving credit to them is what exactly?

If we move to the mortgage sector there have been reductions in mortgage rates. But this too seems to have had a disappointing effect on volumes and an old problem seems to be back.

For Buy To Let lending, lenders in the survey expected a significant increase in demand and lower spreads in 2013 Q2.Respondents to the Bank’s 2013 Q1 Credit Conditions Survey reported a significant reduction in BTL secured lending spreads.

A fundamental problem here is the issue that you can simply increase the supply of credit and demand will appear for it. That at best is questionable right now as we have changed over the credit crunch period and if we move to the small business sector I would like to know all the terms of the offers of bank lending they have received as I suspect that some will be onerous. Splitting supply and demand is much more difficult in practice than it is in a textbook.

In other news the incoming Governor of the Bank of England Mark Carney has stated that “forward guidance” on interest-rates will be a tool of his Governorship. As the Bank of England’s record on economic forcasting has veered between poor and appalling what could go wrong?

The International Monetary Fund 

The last couple of days has seen the International Monetary Fund hold its spring conference. You might think that considering the failures of its interventions in the Euro area periphery some of which are utter failures it might be displaying a large dose of humility. Even worse its Managing Director Christine Lagarde has been offering all sorts of advice which the media are reporting without pointing out that on her track record the correct path would be to do the opposite of what she says!


This entry was posted in General Economics, Growth, IMF, Inflation, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , , , , , . Bookmark the permalink.
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  • ernie

    Thanks Shaun – more confirmation of my point that they have an intractable problem – the lack of demand for credit. It’s not about the supply of credit.
    I wonder if another issue is that the banks are in a much worse financial state than the media seems to believe? Perhaps the situation with Ireland is a serious problem? I’m not really a conspiracy theorist but I presume that the solvency of banks is the real and only reason behind these schemes.

  • pavlaki

    Once again exactly correct in your observation. Funding for lending has destroyed the meagre interest I used to receive on my savings and yet when I applied for a business loan the banks didn’t want to know. I used my savings instead – is this what FFL was intended to achieve? It has ended up as a scheme to increase bank profits.

  • JW

    Hi Shaun
    Did you see a very strange guest of Jeremy on Newsnight a couple of days ago, none other than Max Keiser. Going mainstream, Max? Whatever next. Anyway he was on to to opine about gold, but as usual, made sure he maxed the opportunity , and amongst other things expressed his view that the balance sheets of the UK’s 4 big banks were still awful and interbank lending was still stymied.
    As we know if you add all the debt , government, psuedo-public,financial, private, the UK tops the league on a per-GDP basis. Hence the BoE tops the league in QE. Got to keep the zombies ‘walking’ somehow.

  • Drf

    Hi Ernie,

    It is even worse than that because successive QE debasement has now significantly eroded the operating capital bases of all enterprises; SMEs because of their relatively low equity-based funding position are now much more affected. SME proprietors have though now become more savvy, and they realise that to borrow unsecured funds from banks to meet this capital erosion is suicidal at the interest rates they are being offered. They are therefore retrenching instead to trade according to their now eroded capital base and laying-off staff and reducing their order books,

    This is all further reducing UK macro-economic activity, but the politicians will not pay any attention to those who know and understand this phenomenon.

  • Midge

    Thanks Shaun for another week of great reporting.So far FLS has achieved just one thing and that is to lower the rates on savings.This combined with wage rises below the rate inflation,as you have said ,this taking a lot of money out of the economy.The minutes from April’s MPC meeting showed that “members saw merits in possible extension of FLS” seems laughable.With this scheme unlikely to finish by January 2014 as planned as there is still plenty of money in the pot and the BOE and the politicians unprepared to change course interest on savings will surely remain low for years to come.Mark Carney has praised the US Federal Reserve for providing the financial markets on the course of interest rates and the doing likewise here would add to the savings rate demise.

  • Anonymous

    Correct, and the lack of finance also acts as a barrier to entry/expansion – reducing competition, increasing prices and hurting consumers.

  • forbin

    Hello Shaun,

    FLS – just another scheme to back door bail out the banks

    As I posted a few days back even for the punter , yet alone SME , loans and mortgages are offered with substantial fees that put people off

    I would say that was intended by the banks – they can then say to the politicos – “look look , we lowered interest rates , arent we good little boys and girls! ” and that no one took then up was due to “bad naughty ” customers , who obviously cannot be bothered to take our “cheap” rates………bad SMEs , bad customers!*

    ( then they pocket the low rate cash and whistle whilst walking to the door counting yet another large bonus payment….. )

    (* no , we’re not that stupid to get stung by back handed charges ! )

    got to laff haven’t you ?


  • Jan

    Perhaps it’s time to change tack and stimulate the economy by giving us all some cash (even a tenner would be nice!); bypass the banks entirely.
    I seem to remember George Bush giving Americans a tax rebate at one point or am I dreaming?

  • Anonymous

    Yes, but it was a halfbaked idea based on borrowing the rebates. At some point the loans need to be repaid with interest added. Real tax cuts need spending discipline and balanced budgets.

  • forbin

    yes it would be – think of that 375billion QE – what have we to show for it

    at least with the olympics we had a show , then some crappy buildings left over …….

    the banks took it – and its gone !

    I posit that theres such a large hole in their accounts that even Stephen Hawkins would believe we managed to make a Black Hole on earth ( not just for sucking up actors from insurance companies ) …..

    actually , think of this

    “Every Government soon runs out of its tax payers money….”
    ( and with luck , somebody else’s !!)

    yay Maggie!


  • Drf

    Hi Midge,

    But the problem is that there is no “money in the pot”! The “money” being used for the FFLS is just more Monopoly money (QE debased MIckey Mouse “money” with no possible exit strategy). It is all in reality just another gambit in the game of forcing and holding interest rates down to a negative real value, to avoid insolvency of banks and the UK government.

  • Noo 2 Economics

    Hi Forbin,

    “FLS – just another scheme to back door bail out the banks” Yes I have argued this for months now. It’s well known that the banks have a lot of debt to roll over this year and next in particular – enter FLS.

    Then there’s their next problem of Basel III requirements – No problem, reach for FLS and more QE if it looks like FLS won’t get the job done on it’s own.

    So why doesn’t the BOE demand the money back when it’s not lent out? Because the FLS agreement is so shaky it allows the banks to renew existing loans to businesses etc (via rolling over their debt through bond issuance) which count as a “new loan” according to the agreement written by the BOE. Clearly the Bank has a very different intention for the use of these funds from it’s stated purpose.

    Actually, what with guaranteed cheap financing, low cost base (courtesy of the taxpayer) and high mark up UK Financials are looking more and more attractive aren’t they?

  • Noo 2 Economics

    Hi Shaun,

    I think this is very amusing. The “Independent” BOE is desperate to create inflation to help it’s Treasury master inflate it’s way out of the debt pile. So they try QE – doesn’t work well enough so next they try FLS but as you say there’s little demand for it amongst consumers. They just can’t get the people to behave like lemmings can they? It must be very frustrating for them.

    I think they will eventually come to the idea of helicopter cash as suggested by Jan, but it will be accompanied by provisions that it it will only be given to you when you sign an HP agreement for something. Then they can start releasing the excess cash they’ve pumped into the system and really start ramping up money velocity and then we will be looking at Argentina wishing our inflation rate could be as low as theirs!!

  • Neil Wilson

    Yes that is the point.

    The crisis is caused by excess financial saving over investment. Getting people to spend their savings is the point of reducing interest rates (as well as trying to encourage more borrowing).

    The problem is that the more you lower savings rates, the more nervous people become and the more they seem to save.

    The biggest culprits are the corporates – which have vast hoards of cash at the moment that they are refusing to distribute to shareholders and owners.

  • JW

    Oh please less of the MMT/sectoral balance mumbo jumbo. There are imbalances but they are global; Germany, Far East. Your own 3rd paragraph points to the weakness of your approach; the psychology of people ( and people run companies) works in ways contrary to simplistic ‘economic theory’.

  • Anonymous

    Hi Ernie

    It is my opinion that the state of our banks is not only worse than we are being told but probably much worse. I have advanced the view on here that one of the ways out of this mess for us is to properly analyse and reform our banks. Instead we get assurances that everything is fine whilst official policy is to shovel money into them as fast as they can!

    Isn’t the truism, don’t look at what they say instead look at what they do?

  • Anonymous

    Hi Neil and welcome to my part of the blogosphere

    As to “The problem is that the more you lower savings rates, the more nervous people become and the more they seem to save.” you have approached the subject which made me start this blog back in November 2009. It was my opinion then that as we approached zero interest rates economic behaviour would change unfavourably especially compared to both the economics consensus and the textbooks and that is how it has turned out.

  • Anonymous

    Hi JW

    Max Keiser has popped up on the The Daily Politics on the BBC a few times so perhaps at least some sections of the BBC as facing up to the disasters of their economics analysis…

    As to our banks you know my view. They are our economic problem number one and until we sort it there will be no recovery unless as it was put in the book/film 2001 “something wonderful” like cold fusion working happens.

  • Anonymous

    Hi Midge

    Thank you. As to the FLS if you go back in time and look at past Monetary Policy Commitee minutes you will see promise after promise about FLS so they endgamed themselves. They got into this mess because they had to back up another failure (£375 billion of QE) so to coin a phrase of a past UK Prime Minister it goes “on and on and on..”

  • Anonymous

    Hi Jan

    It would be in my toolbox for monetary measures to prevent a depression so should I manage to get on the Monetary Policy Committee and we turned downwards….

    This was in fact explicitly tried in Japan at one point where individuals were given £142 each to spend. Whilst it was not a success there are still plenty of grounds to believe that it would work differently in the UK as whilst there is the “turning Japanese” element to our economic life there are also differences. Also as you point out there is an element of this type of move in any tax reduction…

  • Anonymous

    Off topic but… I wondered what you made of Rogoff and Reinhart’s fall from grace. Economists who apparently used Excel databases for their research data and number crunching (!) and managed to forget to include a whole column of figures, thus creating a proof that turned out to be false.

    Bit of a blow for the credibility of economists generally.

  • Anonymous

    Hi Shaun,

    It’s off topic, but I investigated my power bills due to recent discussions about comparative power bills.

    CEZ have been charging us commercial rates on residential properties, 15 euro cents per KwH, the residential rate is about 10 euro cents per KwH. Both figures are calculated to include VAT and fees as per the bill. Bulgarian residential electricity looks marginally cheaper than the UK – I’ve been mistaken here …. but not surprised to find that CEZ is scamming me yet again.

  • Neil Wilson

    Except that the sectoral balance ‘mumbo jumbo’ is saying that what needs to happen is to smooth that out – then you don’t get people without work when there is no need.

    And the only people that object to that seem to be nihilists.

    I’m with Jim Kirk on this one. I don’t believe in no-win situations.

  • Anonymous

    But economic approaches based on sectoral balances – including MMT – are not simplistic. What is simplistic is to say it’s about psychology and not engage in an economic analysis.

    Under different circumstances a lower interest rate may help to increase spending and so the demand for credit from credit worthy borrowers.

    As it is the financial system is broken and, as Shaun points out, the private sector is repairing its balance sheet.

  • JW

    There is nothing simple about the psychology of humans.
    However ‘economic theory’ , including MMT/sectoral balances , is generally post-event and tries unsuccessfully to explain macro events with the equivalence of ‘Newtonian’ maths and logic. It is completely unable to deal with dynamics, uncertainty and ‘chaos’.

  • Anonymous

    And, of course I didn’t say that human psychology was simple.
    You are wrong to say that economics cannot deal with dynamics and uncertainty. There are branches of economics that can deal with this and flow of funds in the sectoral balances approach is a useful adjunct to this approach because it reminds us that there is an actual economy out there and it consists of financial stocks and flows as well as real assets.

  • JW

    Every time there is an inflection point , economic theory breaks down , and this is the easy stuff. As for the ‘real world’, it doesn’t move in smooth lines, but rather in a series of discontinuities. Physical science moves to explain this, ‘economics’ isn’t a science, but rather a debating society still grappling with Newtonian concepts.

  • Anonymous

    Being satisfied of the existence of economic theory that can replicate inflection points in the business cycle – and without ad hoc assumptions to the effect that inflection points occur – then I reject the validity of your first sentence. What is more that theory is consistent with sector accounting.