Banks must boost lending to UK businesses to support a sustained economic recovery, the deputy governor of the Bank of England has warned.
Paul Tucker, deputy governor in charge of financial stability, cautioned businesses were still facing a lending squeeze and said the credit drought threatened to hold back a recovery.
In a speech yesterday to the Association of British Insurers, he said: “It is unclear... whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery.”
He said there was likely to be a temptation for banks to hoard cash until the financial woes pass but stressed it was “in the best interests of the banks themselves” to free-up credit to business.
“There cannot sensibly be free-riders. If all banks were to adopt such a strategy, recovery might end up being anaemic at best which would feed back into the banking system itself — increasing defaults and depleting banks’ capital,” he said.
Mr Tucker’s comments follow worrying figures last week that suggested business credit was still in short supply.
The Bank’s data on money supply for April revealed lending to businesses dropped by £4.7bn, leading to doubts over the success so far of the Bank’s quantitative easing programme.
And a CBI poll of UK businesses confirmed the sector’s financing woes, with a net 20 per cent of firms saying they found it more difficult to secure new funds in the three months to May. Mr Tucker said progress on bank lending to businesses may not become clear until the autumn. However, he said there were “encouraging” improvements in the corporate bond markets — another crucial avenue for businesses to raise cash.
Indicators have also suggested signs of economic recovery, across business sectors, confidence and financial markets, according to Mr Tucker, although he said these were only “small steps”in what is set to be a gradual recovery.