“The banks themselves did not bring about the underlying challenges facing the euro area,” Tucker said in a speech in London late yesterday. “Given the costs to our economy, the authorities, including” the U.K. central bank, “need to consider what more we could do to alleviate tight credit conditions in the U.K.”
The Bank of England has said that the turmoil in the euro area, Britain’s biggest trading partner, poses the biggest risk to the economy and financial stability. Tucker said that U.K. lenders’ funding costs have risen on concern that they may be unable raise adequate defenses against a collapse of the euro area, and these costs are being passed on to corporate and household borrowers.
“There is no amount of capital reasonably available to them that will reassure the markets that they could withstand the most extreme tsunami if the euro area were to unravel,” he said at the event, organized by the Investment Property Forum. “An event with low probability but gigantic impact affects bank funding costs. That is gradually being passed on into lending rates.”
Tucker’s colleague Adam Posen said this week that the Bank of England should expand its stimulus program and buy assets other than government bonds to “allow more direct targeting of financial sector dysfunctions.” He said the “critical gap” that needs to be addressed is lending to small and medium companies.
Banks are also charging more for home loans. U.K. two-year fixed mortgage rates rose to 3.66 percent in May from 3.22 percent in December, the Bank of England said today. The five- year fixed rate increased to 4.27 percent from 4.06 percent.
Speaking at the same event as Tucker, Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester said Britain has “probably been the most aggressive of all regulatory” environments and that tougher rules may be having a negative impact on credit growth.
“One of the things that policy makers have to wrestle with in correcting some of the issues from the past” is that they are “at the same time making banking unattractive and unappealing and encouraging banks to withdraw credit,” he said.
While these measures “need to be taken,” the pace of implementation is “very sensitive,” Hester said.
In response to questions, Tucker said steps taken by U.K. authorities to improve financial regulation have bolstered confidence.
“If we weren’t rebuilding the rules of the game of finance, I think confidence would have remained very weak and the economy would have been even weaker,” he said. “It’s a long haul back to normality.”
The Bank of England’s Financial Policy Committee, which is taking over financial regulation in the U.K., will hold its next quarterly meeting in London on June 22 and publish a statement one week later. It said in March that it “remained concerned that capital was not yet at levels that would ensure resilience in the face of prospective risks.”
Tucker said that many U.K. banks have made “good progress” in repairing balance sheets since 2009. Still, tight credit conditions are impeding the rebalancing of the U.K. economy. Given companies’ and households’ dependence on bank borrowing, it is “serious that bank lending growth has, in aggregate, remained so weak,” he said.
“With the worst still possibly ahead of us rather than behind us, banks should take what opportunities they can to build their resources,” he said. “In the event of a tidal wave rather than a tsunami, we might all of us -- banks and their stockholders, as well as the authorities -- be grateful for a few extra billion making the difference to firms’ survival.”
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