Forcing banks to build reserves 'could be self-defeating'

FORCING banks to squirrel away more of their money could have "profoundly negative consequences" for the UK economy, the chairman of the British Bankers' Association (BBA) told its annual conference yesterday.

Marcus Agius, who is also chairman of Barclays, said that holding on to more capital is "undeniably important for making banks safer" but, carried to extremes, it could stop banks lending when more loans are needed to stimulate economic recovery.

Banks may also be forced to charge more for their services in order to build up their reserves, he warned. There was also a danger that lenders could become unattractive to private investors, which would be "self-defeating" as the sector strives to ensure no further taxpayer bailouts are needed.

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His comments come after Bank of England Governor Sir Mervyn King recently called on the sector to put aside more money while times are good to protect institutions against any future stress. Agius said it was "critical to appreciate that banks cannot and never will be risk-free".

He added: "I do have a concern that some regulators seem to believe that ever-more capital is the solution to every regulatory problem. More capital may reduce the probability of a bank failing, but it can never reduce this probability to zero. And talk of bank investors being prepared to accept utility-type returns is completely unrealistic."

But the BoE's deputy governor, Paul Tucker, told the same conference that Britain needs to redraw "social contracts" between banks and the public to avoid a repeat of the catastrophic events of 2007-9.

The conference coincided with figures showing that bank lending to businesses fell once again in May - raising fresh fears that targets agreed with the UK government under "Project Merlin" will be missed. Bank lending to private non-financial companies fell by 1.8bn last month, compared to a drop of 700 million in April, the BoE said.