Borrowers stand by for rejection as banks keep purse-strings tight

The credit crunch is far from over, the Bank of England has warned.

People with poor credit histories will continue to find it hard to obtain loans, the Bank said in a report, as lenders remain cautious about whom they lend to following the turbulence in the world money markets.

In addition, companies may find it harder to raise loans, which could dampen UK economic growth. This in turn, the Bank warned, could have a negative effect on share prices.

The upheaval in the international money markets, which has led to banks tightening their lending criteria, was prompted by the collapse in the American sub-prime sector. Sub-prime loans are sold to people with poor credit histories who have a greater chance of defaulting.

The tightening of lending criteria led directly to the recent Northern Rock crisis. The Rock, the UK's fifth- biggest mortgage lender, had to ask the Bank of England for an emergency loan so that it could continue to offer credit and mortgages to its customers.

The move sparked widespread panic and the first run on a UK bank in 140 years, as thousands of savers rushed to withdraw their cash.

The crisis at Northern Rock abated only when the Treasury said it would guarantee the savings of the bank's customers.

Comments