Belfast Telegraph

Monday 28 July 2014

Banking shortfall demands attacked

Britain's banks are braced for yet more dire news

Demands for banks to hold an extra £25 billion to guard against future financial shocks have been criticised for potentially stifling cash-starved businesses.

The Bank of England's Financial Policy Committee (FPC) said banks needed to meet the shortfall to bolster their balance sheet strength in the face of a potential £50 billion blow to their reserves over the next three years.

It said they will need to find the £25 billion by the end of the year, either by raising new capital or restructuring their balance sheets.

Lenders have already drawn up plans to fill around half the shortfall, which is less than many feared in the City after the Bank warned last November it could reach as much as £60 billion. But experts warned plans to force banks to raise capital will threaten the recovery by tightening the lending squeeze for small businesses.

The CBI business group said it was "difficult to see" how banks could bolster their capital cushions without restricting lending.

Richard Barfield, banking director at PricewaterhouseCoopers (PwC), added they may be forced to cut credit available to borrowers, given that there is little appetite in financial markets to invest capital in the sector.

"Without external capital-raising, the principal way for banks to achieve more demanding capital ratios would be to reduce lending or carry out more de-leveraging, which is not conducive to economic growth," he said.

Business secretary Vince Cable also weighed in, hitting out at the FPC's hardline stance.

"The idea that banks should be forced to raise new capital during a period of recession is an erroneous one," he told Sky News.

"This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME lending," he added.

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