Anthony Hilton: Can the banks have their cake and lend it out too? Something's got to give

I have no problem with the Bank of England being in charge of monetary policy and having the responsibility to help deliver stable prices and economic growth. Separately I have no problem with the Bank of England having overall responsibility for the stability of the financial system. The problem is whether it is possible for the Bank to do both at the same time.

There is nothing new in this observation – it was at the core of objections to George Osborne's knee-jerk decision when he came to office to break up the Financial Services Authority and return responsibility for banking supervision to the Bank – a decision which comes into effect this weekend. But developments this week put it into sharp focus.

For some months now we have seen the Monetary Policy Committee of the Bank come up with various devices to encourage the banks to lend more to business. The biggest and most ambitious of these is the Funding for Lending scheme, which in effect subsidises the banks if they make new loans, on top of what they have on their books already. In theory it should make it easier for them to lend more and help to get the economy moving.

But on Wednesday the Financial Policy Committee, the bit of the Bank charged with financial stability, published a report on the health of British banks – prepared for it, as one of its last acts, by the Financial Services Authority. The raw conclusion was that British banks and building societies need an extra £50bn of capital to cope with possible future losses on commercial property and the eurozone, payments in compensation for past misdeeds, and being more prudent in their calculations of risk.

As a result the committee thinks the banks should raise at least £25bn of new capital by the end of this year, and has told another Bank committee, the Prudential Regulation Authority, to make sure it happens. The PRA should then chase the banks to make sure they carry on raising capital.

So on the one hand the Bank is pushing the banks hard to lend more; on the other it is demanding they raise huge amounts of capital, which in effect means that money they might have lent out will instead get diverted to reserves. The timescale must surely mean it is highly unlikely that they will be able to lend more.

The Policy Exchange think-tank helpfully pointed out that bank lending to private companies in the UK has fallen by £10bn a year every year since the start of the financial crisis. "Increasing the capital ratios even further, as the FPC is proposing, will lead to a further lack of credit," it says. "It is the Bank's drive to raise capital ratios that is holding back lending."

The relationship might not as clear cut as this comment suggests. But you do have to wonder whether the best way to get maximum performance from a car is by pressing both the accelerator and the brake at the same time.

PROMOTED VIDEO
Sport
The Manchester United team walk out ahead of the pre-season friendly between Manchester United and Inter Milan at FedExField
News
i100
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
News
media
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz