Indeed, funding conditions have improved so much (not just in prices but in terms of quantities) that it is safe to say that bank funding is no longer a constraint on lending for most UK banks – the larger banks tell us that they are “awash” with liquidity. If you were to go back around two years, tightening funding conditions for the banking system was one of the big issues policy makers and banks were discussing, and it’s striking to see how conditions have changed completely since then. Costs have come down so much that some banks have been able to get funding in the market as cheaply, or cheaper, than we are providing in the Scheme. This is important to understand – it means the scale of FLS draw downs is not a measure of success. In fact the more stressed market conditions are, and the higher market funding costs rise, the more we would expect banks to draw from the Scheme. Going forward, the FLS should help to keep funding costs down by serving as a backstop marginal funding source if market funding costs were to rise. Stage 2: quoted terms and credit availability The second stage in achieving our objective was a reduction in lending rates to the economy and an improvement in credit availability. This has happened, albeit more slowly than initially anticipated.
I will pick out a few of the highlights for discussion. First let me note that the “stress” so far has not involved any actual exit from accommodative policies in the advanced economies. The change in the outlook was initiated by speculation about the possibility that the FOMC might start to slightly reduce the rate at which it is adding stimulus! It would have been a more severe stress if policy rates had actually been changed. Many firms for whom maturity transformation is a major part of their business model will actually be better off if the short-term rates at which they fund themselves are relatively unchanged while longer-term rates rise. Have markets got it wrong? If so then in my view that was not obviously in the price reactions since May (although the extent of the fixed-income sell-off may turn out to have been overdone, especially for the UK) – rather it was the expectations that had become embedded prior to May which had become overly certain even if, at that time, it supported the intent of monetary policy in both the US and Europe. It is important to remember that monetary policy is about decision making under uncertainty. Considerable uncertainty. Policy makers get surprised by economic developments just like everyone else, and that news is often visible to the market before the authorities can even think about the right responses, let alone respond to them.