Building society to tap into Funding for Lending Scheme

Yorkshire Building Society last week said it also plans to use the BoE scheme, which offers institutions cheap debt in return for boosting lending. Lloyds Banking Group also borrowed an initial £1bn from the FLS last week.

“It (the FLS) is there and ready to use,” said Paul Riley, group treasurer at Leeds. “We’ve not determined what the extent of our use will be. The cost of funding under the FLS is relatively very cheap.”

The £80bn Funding for Lending Scheme offers banks and building societies debt at lower-than-market rates, on the condition that they increase their lending to home-buyers and businesses.

Leeds had hoped to raise about £350m from the wholesale money markets during the summer through a residential mortgage-backed securitisation (RMBS).

But when BoE Governor Mervyn King revealed the cheaper State-backed lending scheme in June, Leeds was forced to shelve the bond issue, called Albion No.1, at the last minute.

“It was unexpected and out of the blue,” said Mr Riley. “We had been preparing it since earlier in the year, and we were almost ready to go when the FLS was announced by the Governor. We had done a little bit of work in terms of engaging with investors.

“We decided to change tack and take it as a retained issue. It would have been wrong to continue with that... at those levels.”

Mutuals are increasingly returning to the wholesale money markets in the aftermath of the credit crunch.

However, Leeds is still 82 per cent retail deposit-funded, and all of its residential mortgage lending is covered by customer savings.

Mr Riley said retaining the bond issue gives Leeds the capacity to draw up to £350m from the FLS, as the BoE demands collateral to borrow.

“We’ve created a security which we can use as collateral with central banks like the BoE.”

The RMBS aimed to give Leeds “access to another market”, he said. “We wanted to add that source to our funding. In terms of collateral management it is more efficient. We’ve not got liquidity issues and the markets were open, and there was a market to go out and raise funding.”

The RMBS is backed by a pool of high-quality mortgages, and would have been sold to institutional investors such as pension funds and insurance companies.

“We’ve put a lot of investment into these systems,” said Mr Riley. “Once you’ve done it once you can use the systems again. It was not a wasted process.”