Banks 'hoarding credit'

Banks 'hoarding credit' as lending falls a record £8.4bn

Lending to business fell by a record £8.4bn in July as banks continued to hoard credit for fear of rising bad debts, jeopardising hopes of a swift economic recovery.

By Philip Aldrick, Banking Editor

Telegraph, 02 Sep 2009

'It is becoming clear that the Bank's attempts to boost lending are only having a limited impact as banks continue to hoard money,' said Vince Cable

According to Bank of England data published on Tuesday, loans to "private non-financial corporations" fell 1.7pc in July – the single biggest monthly fall since records began in 1997. Lending was down 2.9pc year on year.

Economists drew attention to the spike in bad debts to explain the ongoing credit famine, which has persisted despite the Bank's decision to pump an unprecedented £175bn into the economy to stimulate lending.

Vicky Redwood, UK economist at Capital Economics, noted Bank figures that showed a £365m, or 40pc, increase in write-offs on conventional corporate debt and £250m rise in write-offs on unsecured lending in the second quarter.

"While the biggest losses on 'toxic' assets may be behind us, recession-related losses on conventional loans are only just starting to come through," she said. "These losses are likely to erode much of the capital that banks have raised. Accordingly, it is understandable that banks are being cautious about lending more, even though their funding costs have fallen."

Banks continued to deflect criticism by insisting that lending has fallen because businesses are repaying debt in an attempt to clean up their balance sheets. However, Howard Archer, chief UK and European economist at Global Insight, said the sharp fall in the July figures "suggests that banks are still reticent in their lending to companies".

The Engineering Employers Federation has reported that manufacturers are still struggling to get credit.

Phillip Hammond, shadow chief secretary to the Treasury said: "Despite Gordon Brown's repeated statements about 'real help now', we learn that lending to business is contracting at its worst rate on record. It is now clear that the Government has completely failed to take effective action on this crucial issue."

Vince Cable, Liberal Democrat Treasury spokesman, added: "It is becoming clear that the Bank's attempts to boost lending are only having a limited impact as banks continue to hoard money. If firms are unable to access credit it is likely we will see even more companies going under, deepening the recession and driving up unemployment."

Businesses were offered some respite by Lloyds Banking Group, which confirmed it has used the Government's working capital guarantee scheme for £3.45bn. The arrangement, which will see the state absorb half of any losses on the loan portfolio, frees up capital to help Lloyds hit its Government-stipulated £11bn business lending target.

There was some good news for homeowners in the Bank data, as mortgage approvals rose to the highest level in 15 months. Lenders granted 50,123 home loans in July against 47,891 in June, though the figure compares with a 10-year average before 2007 of 104,000 approvals a month.

Building societies, however, continued to struggle. According to figures from the Building Societies Association (BSA), savers withdrew £912m from in July and lenders removed £577m of credit from the housing market.

Adrian Coles, BSA director-general, said: "The BSA expects the mortgage market to remain subdued over the remainder of 2009. This is primarily because of the difficulties all lenders face in raising funds. We warned in March that the flow of funds into the mortgage market would be restricted as savings inflows decline as a result of very low interest rates."