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FLS: plugging the savings not the funding gap?

by: James Bawa
  • 14/02/2013
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FLS: plugging the savings not the funding gap?
Designed to boost lending to both households and businesses, which is certainly welcome, it's becoming clear that the government's flagship Funding for Lending Scheme has an unfortunate side effect for already hard hit savers.

Savings rates have plummeted, leaving savers facing ever-decreasing returns on their investments, savings rates have hit an all-time low with very few accounts now offering anything over 3%.

It’s hard to believe that this scenario wasn’t foreseen, however. The tightened regulatory requirements that all financial services providers now operate within dictate that we must maintain a constant balance between our retail inflows and lending activity, with as little reliance on wholesale funding as possible.

The historically low Bank of England base rate has led to lower than ever mortgage rates, and yet we must somehow survive on a margin that’s squeezed at every turn. So why wouldn’t banks and building societies see the Funding for Lending Scheme as a substitute for retail savings, when it carries such an irresistible price tag?

It will be very interesting to see how the scheme affects lending in 2013 as more, smaller providers step up to take their share of the cake. Of course, we all want to see more lending and a more prosperous property market and I’m confident that most banks and building societies have every intention of increasing net lending in 2013.

But the extent of that lending remains to be seen and in the meantime, the forecast for savers remains gloomy.

Given that lending began to pick up during 2012 – particularly among mutuals – and that savers were ticking along, making the most of the best rates available, I wonder if it would have been preferable to leave the market to continue to repair itself?

It’s certainly my hope that the scheme does not prove to be the ‘white elephant’ that some commentators have dubbed it, but actually enables aspiring first-time buyers and hard working small businesses to make progress in 2013.

James Bawa is chief executive at Teachers Building Society

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