FSA relaxes banking rules to kickstart lending

| October 10, 2012 | 0 Comments

By
Rachel Rickard Straus

09:11 EST, 10 October 2012


|

10:27 EST, 10 October 2012

Banking rules have been loosened up to encourage banks to lend to households and businesses.

The Financial Services Authority today confirmed it has made crucial changes to lending regulations, in a move designed to help the UK on the path to economic recovery. 

Until now, banks have had to maintain a certain amount of capital at any time as a buffer against market shocks or a run by depositors.

Relaxed rules: It is hoped the changes will encourage banks to lend

Relaxed rules: It is hoped the changes will encourage banks to lend

Before the rules were relaxed today, banks had to hold ten per cent of the capital they lent out. Now they will be able to hold a fixed amount of capital, even if the amount they lend increases.

The FSA also said that banks will not have to hold any capital at all against new loans made under the £80billion Funding for Lending scheme launched recently by the Treasury and Bank of England.

It is hoped that by allowing banks greater flexibility in this way they will be encouraged to lend freely, strengthening Britain’s economy which has been hampered by poor credit availability.

Blue-chip bank shares rose after news of the rule changes emerged, with part-nationalised Lloyds Banking Group up more than three per cent, fellow state-backed player Royal Bank of Scotland up two per cent and Barclays and HSBC also making gains.

Banks have also been told that they can hold a broader variety of assets in their capital buffers.

The changes come after the Bank and Treasury launched their Funding for Lending initiative offering banks funding at cheap interest rates over a four-year period in return for increasing lending.

Falling interest rates: The Funding for Lending Scheme is thought to have hit savers

Falling interest rates: The Funding for Lending Scheme is thought to have hit savers

The FSA also recently eased rules allowing banks to tap into their so-called liquidity buffers to keep up the flow of lending.

There
had been concerns that banks were hoarding cash to meet capital rules
and harming the economy by lending too little as a result.

The move sees the UK lead the way on a pioneering global strategy to use bank regulation as an economic tool.

But
regulators will have to strike a difficult balance in relaxing the
rules while also ensuring banks are strong enough in the face of
significant headwinds in the eurozone and wider global economy.

Just
last month the Bank of England’s financial policy committee urged banks
to raise more capital, possibly through shareholder cash calls, amid
concerns over the debt crisis in Europe.

Dr
Enrique Schroth, of Cass Business School, said the FSA is ‘playing a
risky game’, adding that it is unclear if the rules relaxation will be
reversed once the economy recovers.

‘The
FSA will have to develop a reputation of sticking to rules set in stone
or acting discretionally. Is the FSA ready to play that game?’, he
said.

The rule changes could also have negative side effects for savers, who are already reeling from record low interest rates.

With
the increased availability of cheap money, made available through the
Funding For Lending scheme, banks no longer have to fight for savers’
cash by attracting them with competitive rates.

As a result interest rates on fixed-rate bonds, cash Isas and easy-access accounts have fallen in recent weeks.

A move towards relaxing the requirement for strong equity buffers seems to go against the Vickers recommendations on banking reform, which only last year suggested they should in fact be bolstered.

Banks holding low levels of capital as a buffer considerably contributed to the severity of the banking crisis in 2008, as investors lost confidence in banks’ ability to survive losses.

Northern Rock and Royal Bank of Scotland were nationalised and part-nationalised respectively when their capital ratios dropped to worryingly low levels.

However Chancellor George Osborne rejected the Vickers recommendation in June. The government defended this position at the time, saying it was ‘conscious of the need to balance stability with the economic recovery’.

The comments below have not been moderated.

The banks are ripping their customers off by paying such low interest rates, these are not supported by low credit charges. Bank profits are still running at immoral levels along with the payment of huge bank bonuses. The government is subsidising lending at the savers expense, it is time to ditch the big banks.

Millie Cameron
,

City of Ripley, United Kingdom,
10/10/2012 16:43

Sub prime anybody?

Littlebodge
,

Brighton,
10/10/2012 16:20

Again, suits the banks right down to the ground. Why would most people borrowing money be a good thing for the economy though? Isn’t this like trying to sqeeze the last drops of water out of a dry sponge? Before you do that the sponge needs a good soaking in a bucket of water so the priotities seem wrong here. It’s a bit like trying to sell more square pegs when everyone really needs more round ones lol. Square peg, round hole as the saying goes :P

Jetty
,

London, United Kingdom,
10/10/2012 15:46

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