Warning new capital rules for banks will hit lending

Published on Wednesday 8 July 2009 21:28

MEASURES to force banks to hold more capital to prevent a repeat of the worst financial crisis since the Great Depression could reduce the availability of lending and make it more expensive, industry insiders last night warned.

As part of industry reforms proposed yesterday by the Chancellor, the Financial Services Authority (FSA) would be handed new powers to force banks to hold more capital which can be used to absorb losses, and greater liquid assets to guard against a run on deposits.

A "backstop" power will also be introduced to prevent banks' borrowing rising too far.

Measures to raise capital requirements further were widely expected by the banking industry despite warnings it would slow the rate of lending.

One banking insider told The Scotsman: "The more capital you hold, the less able you are to lend by definition and the more expensive it is to lend."

Most banks, including Royal Bank of Scotland and Lloyds Banking Group, preferred not to comment on Alistair Darling's white paper. The British Bankers Association (BBA) was careful to welcome the Chancellor's statements.

Angela Knight, chief executive of the BBA, said: "We believe appropriate and effective regulation, capital applied according to risk and good quality supervision, is the cornerstone of a vibrant banking community.

"Banking is a global business and reform needs to be thoughtfully handled so moves in the UK dovetail with those overseas, ensuring the UK sector remains competitive, otherwise business could move away."

The Association of British Insurers (ABI) welcomed increasing capital ratios as a better option than splitting banks up. Its director general, Stephen Haddrill, argued: "We think that improved calibrated capital requirements, coupled with better application of competition rules, would be a better way of addressing banks that are considered 'too big to fail' than splitting them up."

Owen Kelly, chief executive of Scottish Financial Enterprise, described the white paper as a "work in progress" and that its policies would instead rely on further negotiations with European and international bodies making rules affecting banks.

"Today's white paper could only ever be part of the picture," Kelly said. "Over the next 12 months or so there will be a number of decisions made at EU and international levels."

The Chancellor also announced plans to set up a national financial advice scheme and make financial products easier for consumers to understand.

The move was hailed by Otto Thoresen, chief executive of Edinburgh-based insurance group Aegon. Thoresen was the author of a key review charged with increasing access to affordable financial advice for those most vulnerable to the consequences of poor financial decision-making. Thoresen said: "Obviously I'm pleased to see the government's continuing commitment to the money guidance cause. They are proposing to legislate for a national roll-out, and to implement my recommendations for funding."