David Prosser: The real reason many banks are failing to raise their lending

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The Independent Online

Outlook How do we square thecomplaints of borrowing-starved homebuyers and businesses with the insistence of Barclays boss Bob Diamond at Tuesday's select committee hearing that he and other bank chiefs are now lending more than they were? Well, one problem is that even if the banks still active in the UK are lending as much now as they were prior to the financialcrisis, a good number of international banks have pulled out of the country. That's an insoluble problem, of course, but there may also be another explanation for lending shortages, at least in the mortgage market – and one which we could do more about.

This point comes courtesy of investment bank UBS, which has been looking into who is and isn't lending more to homebuyers. In the first category comes Barclays, Royal Bank of Scotland and HSBC, but their extra lending is being at least partially cancelled out by a contraction in mortgage advances at Lloyds Banking Group, the country's biggest home loan provider by quite some margin.

Why is Lloyds cutting back on lending? Not, as public outrage might have it, so it can finance bonus payments. The real answer is Lloyds' determination to end its reliance on the State: it is racing to repay the billions it took from the special liquidity scheme (SLS) before the end of 2012 deadline that has been set by the Bank of England for the closure of this facility.

Indeed, UBS points out, Lloyds has been able to raise £40bn of new funding over the past 12 months, twice as much as it had hoped. But all of the additional money has gone towards repaying the SLS, rather than funding new mortgage lending.

Now, there will be many people who think it is absolutely correct that Lloyds should be prioritising paring down its dependence on the State, rather than making loans to house purchasers. And the Bank of England is self-evidently right in its insistence that for credit markets to normalise and the economy to return to a clean bill of health, it has to wean the banking sector off the support it has been extending.

Still, this is not going to be achieved without some painful side effects – and the constraints on lending at banks such as Lloyds is one of those. In a debate clouded by anger about bonuses, this point will no doubt be missed, but while the Government is currently urging banks to lend more, the Bank of England is effectively preventing Lloyds – and, no doubt, others – from doing so.