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BrackenOctober 29 2012

How government-subsidised lending can hit wholesale markets

The UK's Funding for Lending Scheme may be a politically attractive way to incentivise banks to step up lending to households and companies, but it could have some unintended side-effects.
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The Bank of England’s new Funding for Lending Scheme (FLS) is already making a positive impact on the UK economy, with lenders showing tighter mortgage pricing. But it is also fundamentally changing the way that bank and building society treasurers in the UK are now planning their mid- to long-term funding strategies. It is giving them something of a headache as they seek to balance FLS, deleveraging, retail deposits and the wholesale funding markets – not to mention political considerations around increasing lending. 

Indeed, treasurers from many UK banks say that they see the FLS as a significant partial replacement for the wholesale funding market – at least for the medium term. The primary covered bond and securitisation markets – the wholesale markets open to banks that prefer not to access the expensive senior unsecured market – will slow down significantly. In the long run, spreads here may well contract as investors are denied supply of paper in the volumes they are accustomed to.

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