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Wednesday, 2 September 2009

Banks hoard cash, lending to business down £8bn

Well who would have thought it? Banks get rescued, money gets pumped into the system (QE) and the next thing you know is, lending to businesses and consumers falls!

In July net lending to non bank businesses fell by a staggering £8.4bn in July. The reason, bad debts and the bank's fear that much more bad debt is in the pipeline.

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.

So what is going to happen in the next 2 quarters for companies looking for working capital support? I guess more of the same is on the way. Tighter business lending will inevitably lead to more pressure on businesses to cut costs, they'll avoid taking sales where they worry about getting paid, more redundancies will result and ultimately more business closures.

Would it not have been easier to let the banks go bust or agree to rescue them on condition that there was full and frank disclosure on the bad and doubtful debts the banks hold? Or is the banking system's ability to assess bad and doubtful debts so poor that they simply don't know?

Until we know what the bad debts are likely to be, I believe the banks won't lend. How to unpick that impasse is one for the debate up to and beyond the next election.

Going back to SME business lending "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."

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