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In its Financial Stability Report, published today, the Bank of England has decided to call time on the Funding for Lending scheme, the mechanism by which it supported bank loans to consumers. In its report, the Bank stated that: “the Bank and HM Treasury have decided to modify the Funding for Lending Scheme to remove direct incentives to expand household lending in 2014.”

The report went on to describe the change by saying that it did “not intend to extend its temporary policy of allowing banks that increase household lending eligible in the Funding for Lending Scheme (FLS) to claim an offset in their capital requirements.”

The reason for the removal of this scheme is that, as the report makes clear, the Bank’s view is that credit conditions, which in the aftermath of the crisis were constrained, are now much more favourable, and that “market-based funding costs have fallen substantially” since Funding for Lending was set in place.

So credit conditions are now improved. But another incentive for this decision might be detected in the report’s alarming sections covering household debt, especially high loan to value mortgages, which the report says have become more common in Britain, especially among first time buyers who are having to borrow at high multiples of their income.

The report raises concerns about the extent of mortgage lending, noting that a “housing market downturn would pose direct risks to bank capital by increasing credit losses.” One conclusion to draw from this is that the Bank is worried about a house price bubble. If that is so, and if the Bank now intends to restrain rising house prices, then it will be removing a good news story that has proved politically very useful for the Chancellor and Prime Minister. Unlike his predecessor Mervyn King, the Governor the Bank, Mark Carney, is both monetary overseer and financial regulator. That is already proving to be a most political position to occupy.

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