In a speech delivered today at Richmond University the Bank of England´s (BoE) Executive Director for Markets and member of the Monetary Policy Committee (MPC) -Paul Fisher- describes the decision to "do something innovative" as necessary given that many of the underlying problems in the Euro area and in the financial sector are outside of the UK's direct control.

Mr. Fisher also underlines the strong incentives created for banks to boost lending, since every pound of additional lending increases the amount that a bank can borrow in the Scheme by a pound. Meanwhile, if a bank's lending contracts, the price of the Scheme will be higher.

Critically, he states that: "We cannot expect every bank in the Funding for Lending Scheme (FLS) to increase its stock of lending to the real economy over the 18-month [drawdown] period ... the crucial impact will be whether the FLS enables them to lend more than they would have done in its absence". In this same vein, he believes that the announcements of reductions in interest rates and the loosening of terms and conditions are indicative of an early impact.

Also of interest, Paul Fisher suggests that the new liquidity regulations should be designed as far as possible to be counter cyclical so that they are less demanding during a crisis, such as now, than at other times. In this context, he notes the recent recommendation of the Financial Policy Committee to the FSA to make it clear that the new liquidity buffers introduced by the FSA in 2010 may be used in the event of a liquidity stress.

At least some private sector economists however seem to be a bit more reserved in their prognosis. Thus Barclays Research today issued a note in which it says that: "For the time being, lending growth remains subdued. Aggregate lending to households and non-financial firms (the FLS-relevant lending measure) grew by just 0.1% 3m/3m in August. We expect that a number of lenders, notably the partially state-owned banks, are likely to see static or shrinking lending over the 18-month FLS drawdown window. While we expect to see lenders pass on their lower funding costs to borrowers, these effects are likely to be fairly small because the additional funding covers only a relatively small portion of banks' balance sheets, and we do not think that banks will substantially relax lending standards to promote new lending."

Of note however, the above economists add that, "In addition, the FLS may provide lenders with more scope to cut deposit rates in the event that the MPC cuts Bank Rate, relaxing one of the main constraints that have prevented the committee from cutting rates further.

"We continue to expect an additional £50bn of quantitative easing (QE) and a 25bp rate cut in November, although the rate cut is a marginal call as it is still by no means clear that the committee is convinced that the FLS will sufficiently relax the constraint on cutting Bank Rate."

For his part, James Ferguson, at Westhouse Securities argues that the purported positive effects of the authorities´ new lending mechanisms (state bank and the new Funding for Lending Scheme) will be null at best. In his own words: "The problems are threefold: one, this will all take time, with the new state bank at least a year away from buying its first book of loans. Two, this all assumes it gets off the ground anyway, with little to show for funding or lending yet. Three, most obviously the impact is likely to be neutered by the fact that three of the UK's major banks (RBS, Barclays and Lloyds) have between them more than £250bn of loans outstanding that are not backed by retail deposits. Thus even if both schemes are a success, the most likely outcome is not net new lending but just a transfer of these outstanding loans over to the new funding forms."

AB

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