UBS: Funding for lending stunted by capital rules

Tim Wallace
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THE LATEST plan to boost bank lending and kick-start the economy might be hamstrung by the impact of other regulations on banks, analysts from UBS warned yesterday.

Because the Bank of England is pushing banks to increase capital levels to make themselves secure in case of a Eurozone meltdown, banks cannot increase lending, the report from the Swiss banking giant claims.

Previously governor Sir Mervyn King has called on banks to boost capital levels by cutting pay and dividends – but UBS claims such action has already gone as far as it can.

“Banks are not making profits; pay almost no dividends; and have seen cash bonuses fall by 80 per cent or more. None are likely to be able to make meaningful capital contributions in the near future,” said the report from analyst Alastair Ryan.

“Higher capital ratios will have to come from smaller balance sheets, further driving the deflationary pressures in the UK.”

But if the Bank removes demands for higher capital levels, the funding for lending scheme “could be a powerful tool,” Ryan argued.

However the Bank of England strongly denied that it is standing in the way of a recovery.

“The financial policy committee’s recommendations directly complement the funding for lending scheme, they do not undermine it,” said a spokesperson from the Bank.

“Higher capital levels for banks increase their resilience to losses, while reducing their funding and lending rates. That will support credit growth and spending in the economy.”

They added that “higher levels of capital also help to finance extra lending directly. Capital is lent out, it is not kept in a vault.”

Elsewhere, it was reported that the European Central Bank is lobbying regulators to ease liquidity requirements for banks in an effort to free up cash to be loaned out.

Meanwhile economists at JP Morgan warned the government is likely to miss its budget deficit targets.

As a result they expect George Osborne to be forced to implement further tax rises and spending cuts worth roughly 0.4 per cent of GDP in 2017-18.

He will also miss his target of seeing the national debt fall as a percentage of GDP – the aim was for it to fall in 2015-16, but JP Morgan expects it to happen a year later.