Lack of credit damaging recovery, Bank warns

More than three years after the start of the credit crunch, the Bank of England warns today that a lack of available credit "continues to be one of the main factors holding back the economic recovery". Writing in the Bank's latest Quarterly Bulletin, officials also repeat warnings about the size and concentration of Britain's banking sector: "It is increasingly recognised that having too important to fail institutions is a paradox that must be tackled.

"Collectively, UK banks' balance sheets are now more than 500 per cent of annual UK GDP, with much of this growth having occurred over the past decade. Three of the four largest banks individually have assets in excess of annual UK GDP."

Reforms in the Big Bang of 1986 are blamed for the emergence of the "too big to fail" problem. This deregulation "freed competitive forces in the banking system and allowed banks to pursue efficiencies through functional and geographical expansion.

"But, as banks grew and broadened their scope post-deregulation, they increasingly became 'too important to fail'. This may have altered their private incentives in a fundamental way."

The central bank's staff partly support the argument from the commercial banks that lack of customer demand is constraining their lending.

Detecting a "substantial and persistent tightening in credit supply conditions from mid-2007", they add that "weaker credit demand – probably associated with the impact of the global financial crisis – is also likely to have contributed to the weakness in bank lending".

However, they conclude, "Qualitatively, tight credit supply is likely to have been the dominant influence".