Bank lending squeeze a threat to recovery, MPs warn

New banking regulations are hindering the banks’ ability to lend, putting the country’s economic recovery at risk, MPs have warned the Bank of England and City regulator.

Andrew Tyrie, head of the Treasury Select Committee, wrote to the governor of the Bank of England, Mervyn King, and chief of the Financial Services Authority (FSA), Hector Sants, ‘seeking reassurance’ that both are investigating how the new liquidity rules will affect lending.

Banks will soon be required to hold more capital under the new international Basel III regulations, he said, and though the new rules do not technically come into effect until 2015 banks are under increasing pressure to take early action. In September the Independent Commission on Banking recommended that large UK banks abide by even stricter capital requirements – 10% compared with the 7% Basel III minimum.

Meanwhile, emergency liquidity provided during the banking crisis is simultaneously being withdrawn. The situation is being further compounded by the Eurozone debt crisis, which is making it harder still for banks to find stable funding. Quantitative easing (QE) is also doing little to increase the supply of liquid assets to banks.

‘The squeeze on bank liquidity is running the risk of continued credit contraction, setting back the prospects of economic recovery,’ Tyrie warned. Bank credit fell by 7% in the year to the end of August, according to figures from the Bank of England.

‘None of this is to say that banks should not, in due course, be weaned off extraordinary official liquidity support. They should be,’ he said. ‘But attempting to do it too quickly, in a hostile international economic environment, could risk setting economic recovery back for benefits that are unclear.'

'If that were to happen a second crisis might come to be seen as having been aggravated rather than alleviated by the action of regulators,' he added.

Tyrie is also calling for greater clarification over who is currently in charge of liquidity regulation.