Tough rules on risk set to hit lending to the poor

Tim Wallace
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NEW PLANS to make banks more stable and less risky will succeed in making lenders less likely to fail, but will also encourage lending only to the well off, analysts warned yesterday.

The Parliamentary Commission on Banking Standards wants banks to stop focusing on shareholder returns and instead aim for financial stability, as well as reducing their overall leverage and cutting back on risky lending.

“The commission talked about extending more lending to those without banking services, but the direction of travel will actually be away from those risky markets,” said Professor Andre Spicer from Cass Business School. “So this represents a big opportunity for payday lenders to expand, and we can also expect more growth of mutuals and microfinance firms in those markets.”

Instead he thinks banks will focus on middle class and rich clients who are less risky than poorer customers.

And industry analysts expect lending overall to shrink.

“The commission makes recommendations about increasing the level of leverage.

However, this is a tricky balancing act as increasing minimum capital levels makes a bank safer but tends to lead to a reduction in bank lending to the UK economy,” said Nic Clark from Charles Stanley.

Analysts also fear forcing banks to focus on stability rather than shareholder returns will be harmful.

“This proposal would make banks less attractive to investors, thereby slowing their recapitalisation and limiting their ability to act as an engine of growth,” warned the Chartered Financial Advisers’ Society.

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