Bank safety rules are restricting lending and growth, say critics

Attempts to overhaul Britain's banking system are "backfiring" and holding back job creation and growth, a think-tank has warned.

Tough capital rules are preventing banks from pumping money into the economy, Policy Exchange claimed today. It said lending to companies had fallen by more than £10bn every year since 2009 – a total decline of £57bn since 2008.

"Changes made under Basel III and the Bill on banking reform are ones that move in the right direction," said James Barty, senior consultant at the think-tank. "Yet all of the debate about what to do with the banks is focused almost exclusively on safety. There is no debate on whether, by making the banks ever safer, we are actually preventing a recovery from the last crisis."

Policy Exchange said lending to small and medium-sized businesses had suffered in particular because banks needed five times as much capital to cover these loans compared to mortgage lending.

The comments come less than a month after figures from the Bank of England's Funding for Lending scheme, which enables banks to access cheap funds in return for growing lending, showed that net lending to households and businesses had slipped £1.5bn since last June and by £2.42bn in the final quarter of 2012.

On SME lending, Mr Barty said: "For a bank struggling to meet a capital ratio set by a regulator it is the type of lending they are least likely to do, because it is the most capital intensive.

"We believe it is this capital issue that explains the gap between banks saying there is no demand for lending and companies saying there is no supply. Banks feel they can only lend in a capital efficient way, so they offer to lend but only in exchange for guarantees or security or extra return, which makes the loan unattractive for small companies."

The Government should also oppose further strengthening of the ring-fence around the banks, Policy Exchange said. "We believe the ring-fence is the wrong answer to the wrong question. Retail banks are no less safe than investments banks as Northern Rock, Bradford & Bingley and HBOS proved."

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