Banks rebuked for lax lending

The Bank of England sharply criticised commercial banks yesterday for excessively relaxing lending conditions in the scramble for large corporate business in the current highly competitive market.

Bank officials warned they may have to oblige lenders, causing particular concern to increase the proportion of loans covered by capital reserves. The ease with which Glaxo, the pharmaceuticals giant, recently raised pounds 9bn in bank loans at a surprisingly keen rate to support its takeover bid for Wellcome, was seen as highlighting the new trend. "From a supervisory perspective, a key concern is that banks may no longer be charging borrowers adequately for the risks they are taking," the Bank said in its Banking Act for 1994/95 report, published yesterday.

The most visible sign of what the Bank called a "marked relaxation" in lending conditions for large corporate borrowers has been the sharp fall in margins on syndicated lending, now at their lowest levels since 1989. The Banking Act report also highlighted lower fees, lengthening maturities and looser conditions on loans as other indications of falling standards.

Whereas banks were typically asking for a high-quality five-year corporate loan, a margin of Libor plus 30 basis points, it has now become common to offer a margin as low as Libor plus 15.

Banks are being pushed into this excessive shrinkage of margins by a combination of intense competition among lenders and only sluggish demand from corporate borrowers. The Bank report said there is a "risk that tighter margins on lending to high-quality borrowers will drag down margins for less creditworthy borrowers and that banks will be tempted to boost their interest income by taking on lower-quality lending on which margins are higher but do not adequately reflect additional risk."

The Bank also questioned the argument that commercial banks are offering excessively keenly priced loans as a way of building up wider business relationships with clients.

The Bank described the loosening of loan conditions as a "worrying development". Laxer loan conditions "may mean the scope for lenders to monitor the financial health of borrowers, receive early warning of problems and press for remedial action is considerably diminished," the report said.

The report also noted the Bank's new willingness to consider easing the conditions under which banks may repay capital to shareholders or bondholders. Because of the significant improvement in earnings, banks now have much higher comfort margin of capital above the minimum capital requirements set by regulators. "There is also a risk that resistance from supervisors to attempts by banks to reduce surplus capital could encourage an expansion of balance sheets," the report said. The Bank said that it has reviewed circumstances in which it is willing to allow banks to repay capital, although requirements will be more onerous where a bank is seeking to repay Tier 1 capital rather than Tier 2 capital.

Start your day with The Independent, sign up for daily news emails
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Guru Careers: Graduate Editor / Editorial Assistant

£16 - 20k: Guru Careers: A Graduate Editor / Editorial Assistant is needed to ...

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Day In a Page

Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada
Birthplace of Arab Spring in turmoil as angry Tunisians stage massive sit-in over lack of development

They shall not be moved: jobless protesters bring Tunisia to a halt

A former North African boom town is wasting away while its unemployed citizens stick steadfastly to their sit-in
David Hasselhoff's new show 'Hoff the Record': What's it like working with a superstar?

Hanging with the Hoff

Working with David Hasselhoff on his new TV series was an education for Ella Smith
Can Dubai's Design District 'hipster village' attract the right type of goatee-wearing individualist?

Hipsters of Arabia

Can Dubai’s ‘creative village’ attract the right type of goatee-wearing individualist?
The cult of Roger Federer: What is it that inspires such obsessive devotion?

The cult of Roger Federer

What is it that inspires such obsessive devotion?
Kuala Lumpur's street food: Not a 'scene', more a way of life

Malaysian munchies

With new flights, the amazing street food of Kuala Lumpur just got more accessible
10 best festival beauty

Mud guards: 10 best festival beauty

Whether you're off to the Isle of Wight, Glastonbury or a local music event, we've found the products to help you
Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe

A Different League

Unai Emery’s passion for winning and eye for a bargain keep Seville centre stage in Europe, says Pete Jenson
Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey - Steve Bunce

Steve Bunce on Boxing

Amir Khan and James DeGale’s remarkable Olympic performances were just the start of an extraordinary journey
Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf