The news that The Bank of England’s new Financial Policy Committee (FPC) wants banks to increase their capital requirements will inevitably result in further restrictions on funds available for lending within the private sector despite claims from Sir Mervyn King, Governor of the Bank of England, that banks will not be allowed to cut back loans to individuals and businesses to make good the capital shortfall.
Anyone that works with SME and owner managed businesses knows that the banks are operating under their own in-house rules in relation to the provision of loans to SME’s below a level of £5million, due to the additional perceived risks and refusing to accept the importance of finance within this sector. The requirements placed on the banks will make what is already an extremely difficult market in terms of raising finance seem almost impossible.
The issue for the banks is that they are still restricted by the requirements to strengthen their balance sheets and are reluctant to lend whilst they are still cleansing the problems they created with toxic debt and bad property loans.
Unfortunately, the SME sector and in particular good solid businesses that want to develop and grow, are still going to be paying and suffering as a result of the poor lending decisions that were made during the past. The banks are restricted as a result of a blanket policy rather than a reasonable consideration of each business proposal on its own merits. This latest move by the FPC, asking banks to meet additional capital levels in a way that will not restrict lending is just not going to happen.
Banks have been told that they should reduce the size of their investment banking operations, sell assets, slash staff bonuses and cut dividend payments to investors instead of reducing lending but this does not appear to be the policy that is being adopted.
The idea that banks should be forced to raise new capital at the current time is misguided and potentially damaging as it is likely to prolong the time it takes for the British economy to recover and reduce further the levels of lending to SMEs.
