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BoE forecasts gloomy year for banks

Thursday 5 January 2012 – by Karina Whalley

The Bank of England has released its survey on credit conditions for the last quarter of 2011, exposing the impact of increased regulation on the British financial sector.

The eurozone debt crisis and its effect on banks’ funding conditions will also dictate credit availability over the coming quarter, bank and non-bank lenders told the central bank in the report, released on Thursday.

Although credit availability overall is expected to increase, the economic outlook and tighter wholesale funding conditions will impact it negatively in the next three months, lenders warned.

The BoE review has sparked a pessimistic reaction from commentators including the Economist Intelligence Unit which warned of a gloomy outlook for UK banks.

“The bleak news keeps coming for British banks,” Jason Karaian, financial services industry analyst at the EIU said, “Squeezed on all sides, lenders face harsh funding conditions, strict regulation and subdued demand for credit.”

In its latest survey the UK central bank said increasing spreads have already been reported on lending for financial companies in Q4, with a further widening expected over the coming quarter.

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“Lenders commented that this reflected higher funding costs and the impact of increased regulation relating to banks’ capital and liquidity positions,” the BoE said in its review.

Karaian agrees that funding strains are forcing banks to tighten lending terms but warns that this comes at a time when borrowers are wary of adding new debt to strained balance sheets.

The UK credit supply for the upcoming year will depend on how the ongoing sovereign-debt turmoil in the eurozone affects bank-funding markets, lenders told the central bank.

“Lenders [commented that] economic problems in the euro area had led to stressed conditions for funding markets and interbank lending,” said the BoE.

Across the corporate sector, tighter wholesale funding conditions, the economic outlook and bank balance sheet pressures were cited by the BoE as factors expected to constrain corporate credit availability.

According to the survey, the highest proportion of lenders since 2007 have raised concerns that funding costs will negatively impact lending.

“There is very little to suggest that it will be a happy new year for anyone connected with the UK’s financial services industry,” warned Karaian.

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