BOE's Bailey Says Mixed Credit Data Reflect Policy Lag

Bank of England Deputy Governor Andrew Bailey said weak growth in credit partly reflects a need to deal with existing debt and doesn’t necessarily indicate a failure of central bank policy.

“We are determined to put behind us the legacy of issues that have called into question the capital position of banks during the crisis,” Bailey, chief executive officer of the Prudential Regulation Authority, said in a speech in London today. “The evidence in credit creation is so far mixed, which is not in my view a mark of the failure of policy since this operates with a lag.”

U.K. overall lending declined 300 million pounds ($460 million) in the first quarter, according to data published today on the BOE’s Funding for Lending Scheme, designed to ease access to credit. The central bank and the U.K. Treasury extended the program in April to target small and medium-sized companies and cement the economic recovery.

Bailey said a pickup in credit to these borrowers will depend on the economic outlook and borrowers’ perceptions of credit availability. In assessing the merits of the FLS since it started in August, he said its record “needs to be judged against a worse outlook for lending a year ago.” He also said that more focus is required “on the consequences of debt overhangs linked to commercial property in those parts of the market where there are problems.”

“Incentives to lend to SMEs are therefore in place, no doubt about that,” he said. “But we cannot promise that the results will follow almost as night follows day, because there is more to it than that.”

Capital Levels

U.K. regulators have been assessing banks’ capital as they work to improve financial stability, and Bailey said officials will tell individual firms their shortfalls in the coming weeks.

While Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc said last month they could meet capital requirements without needing to raise new equity, Bailey said this did not mean they have been “let off the hook.”

“Both of those institutions have come a long way from their original business plans and are consequently much safer,” he said. “These banks have agreed to do what we have asked and we will hold them to that. This is a regulator’s promise.”

Bailey said the new regulatory efforts need not come at the expense of the economic recovery.

“Our objective is not to achieve resilience at any cost,” he said. “Our actions must not have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the U.K. economy in the medium or long term.”

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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