Cable warns plan to force banks to stockpile an extra £25billion will hit lending and damage growth

• Vince Cable clashed with Mervyn King over 'erroneous' measures
• Bank of England warns of shortfall in funds to cushion against a new crash
• Industry told to do more to prepare for eurozone shocks, bad debts and mis-selling scandals

 

Business Secretary Vince Cable warned forcing banks to put billions aside will damage economic growth

Vince Cable warned yesterday that Bank of England plans to force lenders to plug a £25billion black hole in their accounts will stunt economic recovery.
In a clash with Bank governor Sir Mervyn King, the Business Secretary said the ‘erroneous’ measures would further depress ‘weak’ lending to cash-strapped small firms.
But Sir Mervyn said they would ‘support lending and promote growth’.
The criticism from Mr Cable also laid bare a rift within the Coalition, with the Treasury saying last night that the measures would create ‘stronger and safer British banks’.
The clash came as the Bank confirmed that the finances of some of Britain’s biggest lenders remain in a parlous state, five and a half years after the near collapse of Northern Rock.
The Bank’s financial policy committee, set up to safeguard the financial system, delivered its grim diagnosis yesterday after a five-month health check of banks’ accounts.
They are still £25billion short of  the amount of spare capital they need as a cushion against future crises,  it said.
This will have to be raised by the end of the year through measures such as selling assets. The FPC said half of it had already been factored into banks’ plans to boost their capital.

The Bank of England warned lenders need to be better prepared for potential fines and future eurozone shocks

The black hole has built up because banks have underestimated the quantity of toxic assets on their books.
The committee warned that over the next three years banks could incur £52billion more in losses than they have anticipated.
The total includes loans to households and businesses in troubled eurozone countries which may never be repaid, commercial property loans in the UK and bigger than expected costs for mis-selling scandals.
Although the watchdog is not allowed to single out lenders, analysts believe the bulk of the problem lies with Barclays and state-backed Royal Bank of Scotland and Lloyds. Barclays and RBS both said they are strong and well-capitalised.
Banks have come under fire for stubbornly refusing to lend to cash-strapped businesses and households.

Bank of England Governor Sir Mervyn King (left) is standing down this summer, to be replaced by Canadian Mark Carney who Mr Cable thinks is opposed to the idea of stockpiling cash

Sir Mervyn said the black hole, smaller than the worst-case scenario of £60billion predicted by the committee last November, is not an ‘immediate threat to the banking system’.
He added: ‘Far from reducing  lending, these recommendations will support lending and promote growth. A weak banking system does not expand lending.’
But Mr Cable said the measures would restrict lending, blowing a hole in the Government’s strategy to breathe life back into the economy.
‘The idea that banks should be forced to raise new capital during a period of recession is an erroneous one,’ he said.
‘The FPC exercise will prolong the time it takes for the British economy to recover by further depressing already weak lending [to small and medium-sized businesses].’