UK banks are in one hell of a pickle over £25bn hole

JONATHAN-SAMUELS.jpg

The conclusion of the Bank of England’s Financial Policy Committee that the UK’s banks need to magic up £25bn by the end of the year could have all kind of ramifications for lending, to both homeowners and SMEs.

Now we know what created the hole — reckless lending by the banks, eurozone exposure and all manner of mis-selling scandals and fines — but where is the £25bn needed to fill the hole going to come from? And what kind of an effect might this have on the economy and property markets?

We’re not exactly talking about small change here.

Love him or hate him, the business secretary, Vince Cable, has a point when he says that this enforced capital raising will almost certainly delay the recovery of the UK economy. After all, we all know that the one thing holding back the economy is credit — or rather the lack of it.

Therefore if the banks have to build up their capital buffers by £25bn, this will surely further reduce the already low level of credit making it through to UK businesses and homeowners?

The Confederacy of British Industry certainly seems to think as much in its response to the announcement.

It’s entirely of their own making, of course, but the UK’s banks are in one hell of a pickle. On the one hand they are being urged to increase SME and higher LTV mortgage lending in order to kickstart the economy and property market, on the other hand they are being barked at by the Bank of England to get their houses in order.

Although Threadneedle Street has claimed time and again that lenders won’t be allowed to reduce their loan books in order to plug the gap, it’s hard to see how this will work in practice.

To raise capital and lend at current levels is surely a mission impossible?

Whatever the Bank of England says, the reality is that both the SME sector and property market could be materially affected by this latest development. In 2013, expect even less lending, and even more conservative criteria, in a bank near you.