Monday 29 June 2009

CORRECT:Frustration With UK Banks Mounts As Lending Stays Low

CORRECT:Frustration With UK Banks Mounts As Lending Stays Low

("=Frustration With UK Banks Mounts As Lending Stays Low," published at 1151 GMT, misstated the name of the British Bankers' Association. The correct version follows:)

By Paul Hannon


LONDON -(Dow Jones)- British banks haven't increased their lending significantly in recent months, despite injections of capital from the government and GBP125 billion in fresh money from the Bank of England.

Economists worry that the reluctance, or inability, of banks to lend more to businesses and households threatens to derail the hoped-for economic recovery.

Political leaders, frustrated that bank lending remains tight and by signs that some banks are again offering big bonuses, see an escalating public-policy issue in the year running up to the next general election, set for June 2010 at the latest.

Monday brought more evidence of the subdued level of bank lending, when the BOE published figures that showed mortgage loans in May rose by just GBP324 million, the smallest amount since records began in April 1993. Total new lending to consumers was GBP624 million, down from GBP1.1 billion in April.

BOE figures also showed that M4 lending to businesses fell by GBP2.0 billion from April, and was 2.1% down on the same month in 2008, a steeper fall than the 1.4% decline recorded in April.

Despite fresh money into the financial system through purchases of gilts and other bonds -- a process known as quantitative easing -- lending to businesses is falling and to households remains very subdued.

That may persuade members of the central bank's Monetary Policy Committee that a further increase in the size of its bond purchases is needed.

"This is worrying for recovery prospects and reinforces the belief that the Bank of England may feel compelled to further extend its quantitative easing program, despite recent improved economic data and survey evidence," said Howard Archer, an economist at Global Insight.

The MPC voted in May to increase its bond purchases to GBP125 billion from GBP75 billion, extending the deadline for completion to the end of August from the end of June.

Quantitative easing isn't the only intiative U.K. policy makers have taken to boost bank lending. Prime Minister Gordon Brown's Labour government has injected fresh capital into two of the U.K.'s largest banking groups, issued guarantees for bank borrowing on the international bond markets, and is providing insurance against losses on bad assets.

In return, the government has said it extracted pledges form the banks to increase lending, and said it is convinced those promises will be kept. But there are signs that its patience is beginning to wear thin.

According to an advance copy of a speech to the British Bankers' Association late Monday, Business Secretary Peter Mandelson will remind the banks that they must meet their obligations to increase lending and will criticize the BBA for failing to provide the in-depth information on bank lending that authorities have sought.

Unless resolved, the dispute could end in nationalization.

According to a report published Monday by the Organization for Economic Cooperation and Development, full state ownership of those banks in which it already holds a majority stake would help, while the closure of other banks should be considered.

"It is essential that the supply of new lending is not held back any longer by banks with insufficient capital to meet losses," the OECD said.

The government isn't alone in being irked by the behavior of banks.

The head of the U.K.'s main bank regulator last week said he was worried by signs that banks are once again taking big risks in trading on their own account, and offering big salaries to hire successful traders from rivals.

"There is now very aggressive hiring going on in the trading activities of investment banks," said Adair Turner, chairman of the Financial Services Authority. "We do need significant changes to remuneration...particularly of investment banks."

The regulator said that some investment banking businesses - including structured finance and credit derivatives - had grown "beyond their socially useful size."

"As long as that's occurring...some people will end up being paid large amounts of money for things that are not socially useful," he said.

The government is clearly aware that popular dissatisfaction is mounting.

"In a decade or more of exposure to businesses on a pretty much a day-to-day basis, I have never felt such a sense of distrust and anger between the financial sector and the rest of the economy," Mandelson will tell bankers late Monday. "People are furious about risk taking and astronomical pay. People are asking how financial services appeared to move so easily from being an asset to a liability for the economy."

-Paul Hannon, Dow Jones Newswires, +44 20 7842 9491,

(Laurence Norman and Nicholas Winning contributed to this story)

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(END) Dow Jones Newswires

June 29, 2009 12:56 ET (16:56 GMT)

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