We recently blogged about overseas banks such as Leumi of Israel and the Bank of China entering the UK market to undercut the traditional UK banks. Today Alistair Darling, the Chancellor of the Exchequer is to meet the main UK banks to discuss their inability to lend. But maybe the Chancellor really knows why the banks are not lending, or at least he should know!
At a meeting with a senior manager of Lloyds we were told that they were struggling to lend because of the criteria placed on them by the UK Government. The main issue was that Lloyds, as with other UK banks, had to increase its cash reserve. This had a knock-on effect, subsequently we were informed that HSBC was to call in £1billion of commercial lending in the UK during 2009. it very much appeared that that our UK banks were all taking a similar action, that was to increase their cash reserves to meet Government regulation.
So, going back to Alistair Darling’s meeting with the banks today, maybe what is needed is to relax the criteria (to a degree) allowing banks to operate under less strict cash reserves. Such action will allow the banks to increase lending. It is all about balance of risk here, allow the banks to reduce cash reserves too far and they could risk failure, but placing too higher (short term) target to increase cash reserves could change what is a substantial recession into a depression.
The overall conjecture here is that if overseas banks are entering the UK market and undercutting the UK banks then there must be a market for profitable and relatively secure lending. So there has to be a reason other than market forces which prevents the UK banks from lending at more attractive rates. And that reason must lay with the UK’s tripartite regulation; Bank of England, FSA and UK Government, reviewing the regulation could have a positive impact on lending within the UK economy.
