Banks could restrict lending by £180bn

by Gill Montia

Story link: Banks could restrict lending by £180bn

Financial consultancy, Capital Economics, is warning that UK banks could be forced to restrict lending by as much as £180 billion in order to bolster their balance sheets.

The credit crisis has prompted a series of fundraisings as banks have been left exposed by writedowns.

The cash calls have been central in improving Tier one ratios (that is to say capital adequacy) across the UK banking sector.

However, rights issues by Bradford & Bingley and HBOS in particular have been the source of embarrassing and alarming headlines that have done nothing to improve confidence in Britain’s financial services sector since the collapse of Northern Rock.

Capital Economics is now predicting that banks will be choosing to hold onto their money rather than lend it, in efforts to increase consumer confidence and uphold credit ratings.

Analysts at the firm do not expect banks to be able to maintain recent levels of lending from the new capital secured, and are predicting that the scale on which lending will be reined in, will cause consumers further financial woes.

According to spokeswoman, Vicky Redwood, UK banks need a combined £65 billion to overcome the ravages of the credit crisis and they have so far raised less than £20 billion in total.