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A well-regulated banking system has no need for credit easing

Analysts see "an unrelenting regulatory burden as the key risk both for bank earnings and the UK economy"

In the run up to UK chancellor George Osborne’s autumn statement on November 30, prime minister David Cameron set the scene for plans to add UK government guarantees to securitizations of loans to SMEs. In a speech to the CBI, Cameron said: 

“I know that it can still be a nightmare for companies wanting to borrow money and that’s why next week the chancellor will say more about plans for a new credit easing scheme. This will use the strength of the Government’s balance sheet to pump billions of pounds into reducing the cost of loans for small and medium sized businesses.”

Osborne first raised hopes with mention of this plan almost two months ago. Former UK ministers, however, suggest it might take a long time to get up and running because of concerns among Treasury civil servants about the potential impact on UK debt ratios. Indeed, the credit-easing plan carries echoes of suggestions for a similar scheme dreamt up in 2009 by then secretary of state for business Lord Mandelson in the last Labour government.

If Osborne wants to ease credit to UK businesses quickly, he might be better advised to ask why the UK banking system isn’t lending more. He should look at the picture below, based on UBS estimates, showing the shrinkage of the productive part of Barclays’ balance sheet potentially available to support lending to the UK economy. 





Compared to their European peers, UK banks are in decent health. They have raised capital, reduced leverage and built liquidity pools. Indeed, Barclays has more than doubled its core tier 1 capital ratio since 2007, reduced leverage by one third and increased its group liquidity pool by almost nine times.

John-Paul Crutchley, analyst at UBS, sees an unrelenting regulatory burden as the key risk both for UK bank earnings and the UK economy. 

“The UK is essentially a fixed banking system. The banks have done everything the regulators told them to do, but there isn’t much lending to the real economy, which is flat lining. The issue is how far the regulators will keep pushing. If you keep insisting on more capital and more liquidity, you simply shrink the productive capacity of the banks. The benefit to the economy of demanding more and more protection against tail risk becomes less and less.”

There’s precious little political capital to be gained for any politician or regulator saying it’s time to go easy on the banks. However, that might be what the economy needs. It seems extraordinary to be dreaming up complex schemes to boost SME credit availability in a country with a healthy and repaired banking system.

- Euromoney Skew Blog

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