The Bank of England yesterday urged the big clearing banks to return some surplus capital to shareholders instead of stoking the corporate lending market with perilously slim margins.
"We have made it very clear that there is another option, that is that banks can repay capital to their shareholders. They do not have to have money burning a hole in their pocket," said Michael Foot, the Bank of England's deputy director for supervision and surveillance.
The Bank has repeatedly warned in past months about the growing tendency of big banks to lend at irresponsible rates because of intense competition in the market place. Referring to syndicated lending, he said: "If you're looking ahead and you're saying what are the clouds in the sky, this is clearly one that could be a significant cloud."
Mr Foot said he expected an increasing number of UK banks, whose balance sheets have been swollen by a period of strong earnings, to follow the US practice of buying back shares, thereby returning some of the excess capital to shareholders.
Earlier this month Barclays became the first British bank to embark on a share buy-back. In the first of what is expected to be a series of modest repurchases, Barclays bought the equivalent of 1.5 per cent of its share capital. Other big banks, such as Lloyds, have hinted at buy-backs.
Mr Foot said the capital ratio of many Western banks - the amount of money they are required to set aside as a percentage of loans on their books - had reached an all-time high.
Competition among banks has depressed lending margins to their lowest since 1989, with British banks lending at roughly a fifth of a percentage point above the London Interbank Offered Rate to top-quality corporate borrowers in 1995, against 1.4 per cent in 1991.
The Bank of England has said it is not clear how the banks can make money out of the big syndicated loan deals at these margins. "Most of the lending banks would say that, where margins are currently, for certain kinds of business, it's not in a sustainable long-run position." Mr Foot said.