Raising capital requirements will wreck lending, bank chiefs warn

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MELANIE BIEN, LENDING CRITERIA WOULD TIGHTEN

Bank chiefs have warned that capital requirements are too high and any further increase would take hundreds of billions of pounds out of their lending capacity.

Speaking at a Treasury Select Committee meeting last week to discuss the Independent Commission on Banking’s interim report, HSBC group chairman Douglas Flint said if capital requirements were to be raised much above 10% it would affect banks’ ability to lend.

Under Basel II regulations, banks must hold capital equal to at least 8% of risk-weighted assets, but this is expected to rise to around 10% under Basel III rules when they are implemented at the end of 2012.

When asked by a TSC member what would be a safe but profitable level of capital for banks to hold, Flint replied: “HSBC’s capital base is £140bn so a further increase in capital requirements of 1% would take hundreds of billions of pounds out of lending.”

At the meeting Bob Diamond, chief executive of Barclays, said he is worried capital requirements are being made too high.

He says: “In the UK capital ratios have increased significantly from their level of 2% in the 1970s and we need to ask what the impact of this is.

“One consequence is the lack of non-UK banks lending in this country.”

Melanie Bien, director at Private Finance, says while banks need to be well capitalised to avoid bailouts in the future, this needs to be balanced with reasonable levels of lending.

She says: “We have seen that high capital requirements have made it hard to secure mortgage finance for those without large deposits and if they were to increase we would see even further tightening of banks’ lending criteria.”