The Funding for Lending Scheme probably still provides UK banks with attractive funding compared with other sources of secured wholesale funding despite the latter having become much cheaper since the FLS was introduced and in spite of OC costs, said the Bank of England today (Tuesday).

The Funding for Lending Scheme (FLS) was introduced on 13 July by HM Treasury and the Bank of England, and is intended to boost lending to the real economy by allowing UK banks and building societies to borrow more cheaply than in the market. The scheme has widely been seen as reducing the capital markets supply of UK bank debt – Barclays analysts point out that no new UK covered bond has been launched since the scheme was announced – although net lending to the real economy had yet to benefit from the scheme in the third quarter.

In a quarterly report released today, the Bank of England said that “the difficulty of knowing the counterfactual” makes assessing the impact of the FLS difficult, but that early indicators suggest the transmission mechanism is working as expected so far.

With respect to bank funding costs, it said that, based on indicative estimates, at the time the FLS was announced on 14 June it would have been around 200bp cheaper than using other sources of secured wholesale funding, such as RMBS or covered bonds, but that this differential has shrunk.

“Given the recent substantial falls in UK bank wholesale funding costs — which have been driven, in part, by the FLS itself — as at 26 November 2012 the FLS was likely to be around 100bp cheaper,” it said.

The central bank acknowledged that comparisons do not capture the effective all-in costs of the different funding sources, for example by excluding the cost of funding overcollateralisation, which in some cases might make the FLS less attractive relative to other sources.

“But that effect may be limited by the broad range of collateral accepted in the FLS, which includes some assets that may not be readily usable as collateral in market transactions and whose use as collateral therefore might not involve any opportunity cost,” it added. “And even after any adjustment for overcollateralisation costs, the FLS is likely still to be an attractive source of funding for most banks.”

Thirty-five banking groups, comprising just over 80% of the stock of FLS eligible loans, had signed up to the scheme by 3 December, translating to an initial entitlement of around £68bn of funding, according to the Bank of England.