Risk & Economy » Regulation » BoE policies impinge lending

BRITAIN’S BANKS have been told they must raise tens of billions of pounds to strengthen their balance sheets against future losses, sparking concerns their ability to lend to struggling businesses could be restricted.

A report published by the Bank of England’s Financial Policy Committee, which is charged with financial stability, warned that banks will need to find £25bn by the end of the year in order to plug a yawning capital hole in their balance sheets.

According to the FPC, banks could face about £50bn in losses over the next three years – related to bad debts exposed to the eurozone and property markets, mis-selling claims and a more prudent approach to risk.

Taxpayers are unlikely to foot the bill, with banks expected to raise the funds by issuing corporate bonds or selling shares. The FPC said the fundraising must be done in ways “that do not hinder lending to the real economy”. But it is hard to see how this can be achieved.

A recent report from think-tank Policy Exchange found that bank lending to private UK companies has dropped by £57bn since 2008. The financial regulator’s desire to raise banks’ capital requirements was cited as the main reason for the lack of credit.

“It’s the Bank of England’s own policies that are leading to a lack of credit to small businesses,” said James Barty, head of financial policy at the Policy Exchange and author of the report. “Mervyn King appears to hold the belief that if only the banks held more capital, they would lend more. Yet the opposite is the case.”

Vince Cable, the business secretary, was also critical of the need for banks to raise fresh capital. “The idea that banks should be forced to raise new capital during a period of recession is an erroneous one,” he told Sky News. “I believe the weight of the argument is in favour of counter-, rather than pro-cyclical lending measures, and I rather suspect that the new governor of the Bank of England shares this view.”