Jeff Salway: Banks use Funding for Lending to line their own pockets

The Funding for Lending scheme was credited with getting lenders working again when the fixed rate mortgage costs fell recently. That response now appears to have been premature – given extra incentive to help borrowers, banks instinctively see an opportunity to fatten their profits.

The £80 billion Bank of England/Treasury programme is designed to encourage banks to increase their lending to individuals and businesses by reducing their borrowing costs.

So far it has been credited with the aforementioned rate war, but that, unfortunately, has been selective. In the absence of stricter conditions on the funding – which should have stipulated that the new lending must focus on first-time buyers – the beneficiaries have been borrowers already with a substantial amount of equity in their home.

The scheme has unfortunately failed to prevent banks from hitting borrowers with unexpected rate rises, with Santander this week declaring its intention to increase its standard variable rate (SVR) in October.

It said the effects of the Funding for Lending programme were already reflected in its lending to SMEs and in mortgage deals such as the 2.99 per cent five-year mortgage launched last month. That deal, by the way, is available only to those with at least 40 per cent equity.

It went on to argue that the limited extent of the scheme means its lending remains predominantly funded by customer deposits and wholesale markets.

A few months ago the latter point would have been more valid, as the Libor rate that underpins fixed rate mortgage pricing continued to rise. It has plunged since March, however, taking it closer again to the Bank’s base rate.

As for using customer deposits to fund lending, savers would be delighted if lenders did more to attract their money. Santander does have a decent Isa rate but the best buy savings tables are dominated by building societies, supermarkets and the likes of the Post Office.

Banks are understandably nervous about wholesale lending, yet their efforts to fund lending by raising cash deposits – as building societies are doing – have been pathetic. If anything, Treasury funding incentives have lessened the need for banks to improve their savings offers even while failing to get them lending to those in greatest need.

There were signs that the Funding for Lending programme may have succeeded where previous initiatives failed. That appears to have been a false dawn – incentivising banks to lend won’t work as long as there’s profiteering to be done.

Millions of people will be poorer in retirement as a result of quantitative easing (QE), but the programme is worth it because without it there would have been a “significant detrimental impact” on savers and pensioners.

That’s the Bank of England’s somewhat dismissive verdict on the effects of QE.

By pushing down gilt yields QE has accelerated the decline in the pension income paid by annuities, the pricing of which is dictated largely by those gilt yields.

Since the beginning of July alone there have been 23 annuity rate cuts according to Hargreaves Lansdown. A 65-year old man retiring with a £100,000 fund today would get an annuity income of £5,591 a year, compared with £5,743 if he’d retired at the start of July.

If you’ve recently retired or you’re doing so over the coming months and plan to use an annuity to convert your pension savings into a retirement income, you’ll will be worse off for the rest of your life as a direct consequence of QE.

Those in drawdown contracts are also affected, with the income they can take from their pensions diminishing as annuity rates fall.

The Bank also argued that the negative impact of QE on annuities and pensioners was offset by an increase in asset prices that has boosted pension savings.

That’s nonsense. Most people move out of equities, for example, well before they retire. They’re more likely to be in cash – the value of which, as it happens, has been eroded by the inflation that QE has helped push up.

The Bank, led by Mervyn King, pictured, also claimed that pensioners are not the biggest victims of QE. In that, it may have a point.

Some more affluent retirees have been boosted by the increase in asset prices that has resulted from QE.

Instead, worst affected are people without assets – property, equities, bonds etc – and the young.

The winners are those holding the bulk of the assets that have increased in value – the richest 5 per cent of the population.

Well at least that’s consistent. The least well-off, the youngest and the most vulnerable in society have been hit hardest by the financial crisis and its implications, thanks partly to a government that sees nothing wrong with punishing them for the stupidity of the elite who got us into this mess.