MPs warn that lack of bank lending threatens recovery

BANKS are threatening Britain’s economic recovery by cutting lending to businesses after being buffeted by the regulatory crackdown and the eurozone debt crisis, a powerful group of MPs is warning.

In a letter published today to Bank of England governor Sir Mervyn King, the Treasury Select Committee claimed that new regulatory requirements had made banks more cautious in their lending as competition hots up for stable funding sources, such as retail deposits.

Andrew Tyrie, the Conservative chairman of the committee, says in the letter that the emergency liquidity provided to banks by the UK government and the Bank of England at the time of the 2008 financial crisis was now being withdrawn.

He says this is happening just as banks are being required, from 2015, to hold more liquid assets – meaning those that can easily be turned into cash – under the international Basel-III regulatory regime on banking capital cushions.

“However, the financial markets are understandably demanding more transparency and monitoring the banks’ performance against the Basel standard, thus putting pressure on banks to take early action. Therefore, tighter liquidity regulation has de facto already begun,” Tyrie writes, in a letter that has also gone to Hector Sants, chief executive of Britain’s regulator, the Financial Services Authority.

The Treasury committee chairman said that while he agreed banks should be “weaned off” extraordinary official funding, “attempting to do it too quickly, in a hostile international economic environment, could risk setting economic recovery back for benefits that are unclear”.

If this were to happen, regulators may be branded as having aggravated a second crisis rather than having alleviated it, he said.

The Bank recently boosted its programme of quantitative easing from £200 billion to £275bn – electronically “printing” money to buy bonds in an effort to provide more money for bank loans to businesses and households.

But Tyrie said in his letter: “Quantitative easing may be a good policy but it does little to increase the supply of liquid assets to banks.”

He added that pressures on bank lending were “now compounded by the effects of the euro area sovereign debt crisis, which has made it harder still for banks to find stable funding”.

Bank credit contracted 7 per cent in the year to the end of August, but there was a risk of continued contraction if liquidity among the banks dried up further, something that could push back the prospects of economic recovery, Tyrie said.

He said it was an issue that he hoped the Bank’s new Financial Policy Committee, which is in charge of macro-economic stability, would consider. The BoE governor is due to appear before the Treasury select committee tomorrow to answer questions on a variety of issues, including how quantitative easing is boosting lending to underpin Britain’s fragile economic recovery.

Britain’s bankers yesterday threw their weight behind the Treasury committee’s fears.

A spokesman for the British Bankers Association said: “The BBA agrees with Andrew Tyrie that increasing the amount of cash and capital banks must hold will have implications for their ability to lend.”

Meanwhile, the CBI will today repeat its call for the UK government to make bond markets more accessible to the UK’s “forgotten army” of medium‑sized companies, which turn over between £10 million and £100m, to raise money in the downturn.

The CBI said: “For too long these companies, which could inject billions of pounds into our economy, have fallen under the radar of policymakers.”