Cross-posted from Martin North’s DFA blog.
Overnight the Bank of England announced the termination of their Funding for Lending (FLS) scheme, moving to direct assistance to the small and medium business sector. The FLS was a mechanism to give funding direct to the banks to enable them to lend to borrowers in an attempt to kick-start the housing market in the UK, which had languished for several years after the GFC. The effect of FLS has been to create momentum in the property sector, but it also drove down savings rates because banks did not need to use deposit funding for their loans. House prices have risen by an average 7% this year.
The Governor, Mark Carney is quoted as saying “Given the access to credit for households now … it would no longer be appropriate or necessary for us to have our foot on the accelerator. It’s better to shift into neutral.” They are clearly worried about a developing housing bubble.
The other UK initiative is Help to Buy, where the government essentially guarantees a top up loan to allow first time borrowers to get a larger mortgage. There has been significant demand for this deal and now there is debate about how long it will run for.
What I find most significant is the change in focus to the SME sector, where firms are finding it hard to get banks to lend to them. The Bank of England is looking to assist, because there is significant long term economics benefits if SMEs are firing.
As I have said previously, in Australia banks are preferring to lend for housing, rather than to support the SME sector.
The DFA SME survey showed that many SME businesses are unable to get the funding they need. Often they are required to provide ever greater information, or a personal guarantee, if they can get funding at all. There is a strong case to make that further assistance to the SME sector could create significant growth in Australia, growth which could replace the mining investment phase as it declines. There is however a capital disadvantage to banks to lend to SME compared with housing, thanks to changes to the Basel capital adequacy rules. Lending to the inflating housing sector is, for the banks easy money. Maybe the UK provides an object lesson for Australian regulators and policy makers!
