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New credit crunch risk as banks face funding crisis
Jonathan Pierce, from Credit Suisse, believes UK banks will have to reduce the size of their balance sheets by as much as £530bn over the next three to four years to meet new regulations.
According to his analysis, British banks need to issue £420bn-£750bn of long-term wholesale funds. “We don’t think this is plausible and hence we expect balance sheet footings to fall by 6pc-18pc to compensate,” he said. He predicts a minimum reduction in credit of £200bn.
UK banks gorged on cheap wholesale funding during the boom to finance a glut of mortgages and commercial property loans. However, the wholesale markets slammed shut after Northern Rock’s collapse and are only just reopening.
The Government filled the gap by providing £319bn of emergency funding, which starts to be repaid next year. The higher funding costs will cause “a loss of 10pc-25pc of net interest income”, Mr Pierce said.
The biggest problem is with Lloyds Banking Group, which needs to raise £185bn-£305bn. “We believe it will have to shrink its assets by £110bn-£230bn,” he said.
“Lloyds believes it can manage the deficit through
a more modest reduction, and has suggested the impact on financials will not be significant. We can’t square this with our numbers.”
Credit Suisse said the pressure on balance sheets will be greatest at the state-backed lenders, Lloyds and Royal Bank of Scotland, for which it assumes “a balance sheet reduction of about 20pc each – a somewhat bigger net contraction in assets than suggested by management”.
The pressure on balance sheets threatens to lead
to further financial protectionism as banks reduce their overseas lending to protect their home market clients and reputation.
According to the Bank for International Settlements, cross-border lending contracted by $3 trillion (£2 trillion) last year.
Still reading about the credit crisis, there was obviously a massive amount of politics that led to the situation. It just proves to show that in the hands of the government is where a lot of these issues start.
I think Greenspan is getting senile, today he said that you can stop asset bubbles by increasing capital requirements. That just increases the cost of credit. The next time you have a real estate bubble, you’ll have the same problem, assuming that banks are still in the business of loaning against real estate. If you want to stop this problem, then eliminate the federal subsidies for real estate development and investment, then require people in that industry to put their own money at risk instead of someone elses. If Greenspan really wants to change the banking system, though, then simply ban 95% and 90% LTV loans. Require a bigger equity cushion. BTW, the “too big to fail” argument is a fallacious one. During the Great Depression, Canada had no bank failures. The reason was that their banks were very large. The banks closed branches, etc., but none of them failed. By contrast, the US was dominated by thousands of very small banks, and we had more than 10,000 of them fail. So there is nothing inherently unsafe about a banking system dominated by large banks. The real problem with large banks is that during good times, they don’t provide enough competition for each other.