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  • Good news for non-bank lessors from Bank of England? Posted on 18 August 2016

    For years, non-bank lessors have been unhappy that their bank competitors have had access to ultra-cheap finance through the Bank of England’s (BoE) Funding for Lending Scheme (FLS). For the right customer and the right asset some of the banks participating in the BoE have been offering low rates that some say are unfairly distorting the market.

    The BoE listened to the concerns and acted - well, sort of. It didn’t open the FLS to non-banks but to be fair that would be quite difficult. Instead in 2013 when the FLS was extended it allowed participating banks to use FLS funds to lend to certain non-bank credit providers (NBCPs) for the first time. Cutting through the plentiful jargon and details, we find that specialist leasing companies dealing primarily in finance leases qualify as NBCPs.

    A few non-bank lessors heard about this and went to meet participating banks, but it usually turned out that the banks didn’t like to say yes.  

    One reason was that although lending to non-bank lessors helped banks to get better access to the FLS cash, lending to ‘normal’ small and medium-sized businesses through their own leasing firms helps a great deal more. Direct lending to small and medium-sized businesses is worth either five times, or ten times, as much as lending via NBCPs, depending on the exact situation the bank is in.

    The BoE announced its new Term Funding Scheme earlier this month, replacing FLS and offer even lower-cost funding to the banks  - but only if they keep increasing their lending to the ‘real economy’. The BoE didn’t immediately reveal whether participating banks would be able to lend to non-bank lessors, but the answer to that was published yesterday. It's a yes. So that puts the TFS on a similar footing to the FLS.

    By comparison the European Central Bank’s equivalent of the TFS - the TLTRO (Targeted Long Term Refinancing Operations) - doesn’t allow participating banks to lend to NBCPs, much to the distress of many lessors in Europe that aren’t banks but are regulated almost as much. Let's give the BoE a point for at least trying to avoid distorting the market.

    It gets better! Unlike FLS, the TFS doesn’t weight lending to NBCPs any differently to lending direct to businesses. The 5 times or 10 times weightings that worked against lending to NBCPs under FLS have gone. Could this now give banks a greater incentive to lend to NBCPs?

    The effects may still be muted by prudential regulation, but it does seem likely that non-bank lessors and other NBCPs could find a warmer welcome from the banks next time they meet.

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