It’s still so early in the New Year but already we have seen the end of the Funding for Lending Scheme – a cheap source of funding to banks and building societies.
Soon, by the end of this month, we will probably see the end of new borrowings under the ‘Funding for Lending on speed’ otherwise known as the Term Funding Scheme (TFS). This was put in place in August 2016 at the same time that Base Rates fell to ¼% and it was the Bank of England’s mechanism to ensure that the rate cut was passed onto borrowers. In essence, lenders could borrow under this scheme at Base Rate flat. Right now there’s nearly £107mn drawn under this scheme and it was increased in size as recently as November last year.
The effect of the TFS has been to fuel mortgage lending at subsidised rates and dampen the requirement for more conventional funding such as retail deposits, securitisation and covered bonds.
So, assuming that TFS is not extended – there’s always room for a last minute reprieve – then what will this mean? Well for a start we will begin to see more competitive retail deposits. Good for savers but expensive for lenders. If a price war starts for deposits then not only will they get more expensive as a funding source but they may well start to become more volatile as deposits move from one bank to another chasing the best rate. That’s not good. Expensive and unstable. Definitely not ‘strong and stable’.
Securitisation and covered bonds should make a come-back. Since the credit crisis these funding mechanisms have been decidedly muted and we really need the large historical issuers such as Santander, Lloyds, Barclays and Nationwide to re-start their programmes in earnest. Although this could have the short term effect of increasing securitisation costs for everyone as the supply and demand dynamics cut in, medium to long-term this can only be good news as we finally get these markets back on track and focus investors on buying them. On the whole – I can’t wait for these distorting schemes to go. They were very important at the time and have done their job. Now we need to get back to business as usual. Finally!
And mortgage rates? Well they will have to rise to reflect the increased funding costs. Standby for some last minute cheap deals as lenders take their fill of remaining TFS availability. Make hay while the sun shines!