Vince Cable: £25bn bank capital raising will hit lending

“The idea that banks should be forced to raise new capital during a period of recession is an erroneous one. This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME lending,” Reports The Telegraph.

His comments add to fears that the increased capital requirements will hit lending, despite the insistence of Sir Mervyn King,Governor of the Bank of England, that banks would not be allowed to cut back loans to individuals and businesses to make good the capital shortfall.

The BoE’s new Financial Policy Committee (FPC) has told lenders to reduce the size of their investment banking operations, sell assets, slash staff bonuses and cut dividend payments to investors instead.
Matthew Fell, CBI Director for Competitive Markets, said: “While the FPC wants banks to meet additional capital levels in a way that will not restrict lending, it is difficult to see how this can be achieved in practice.“

He said: “It’s important that the FPC provides certainty and clarity over capital requirements and takes into account its objective to support growth.”

One senior industry executive said he thought it was “inevitable” that banks would cut back lending if they had to hold larger amounts of capital. “I hear the Governor’s argument, but I can’t see how it can be avoided,” he said.

The British Bankers’ Association warned that raising capital levels needed to be done in such a way as to support growth.

Mr Cable has been critical of bank lending to small and medium-sized businesses, which have complained of difficulties in raising funds. Even the BoE’s Funding for Lending scheme has done little to ease those problems, although it has boosted mortgage lending.

Bonus pools are likely to be among the areas hit as banks look for ways to retain more capital to meet the multi-billion pound shortfalls identified in Wednesday’s FPC report.

Sir Mervyn, who is also chairman of the FPC, said the amounts banks would be asked to raise by the end of the year were “manageable” and did not pose “an immediate threat to the banking system”.

“The meeting of these recommendations does not require additional public funds. Banks can meet the recommendations in other ways such as through restructuring,” he said.

The new Prudential Regulation Authority (PRA), which is also run by the Bank of England, will hold meetings with all the major banks in the coming weeks to discuss how they can meet capital shortfalls.
About half the £25bn shortfall has already been factored into banks’ capital-raising plans, leaving roughly £12.5bn for banks to raise by the end of the year.

HSBC said last month that it did not expect to be asked to raise any new capital, meaning that most of the total will have to be found by Barclays, Lloyds Banking Group and Royal Bank of Scotland. The FPC has not disclosed how its figure breaks down.

“We believe that the bulk of the deficit will reside within the quoted domestic UK banks, with RBS likely to have the largest shortfall,” said Gary Greenwood at broker Shore Capital.

Analysts at Nomura echoed this view and said that Lloyds and RBS were the banks “potentially most affected by the new issues”.

RBS has already set out a series of moves to improve its capital position, including new cutbacks at its investment banking arm, as well as pursuing a stock market listing for its US bank Citizens.

One source close to the bank said that RBS’s current capital-raising plans were expected to be sufficient to satisfy PRA officials.
Cutting bonuses would help banks bolster their capital through increased retained earnings, though it could lead to the loss of important staff.