Banking StandardsLetter from Andrew Bailey, Deputy Governor and Chief Executive Officer of the Prudential Regulation Authority, Bank of England

COMPARING LENDING WITH CAPITAL

At the Governor and my last appearance at the Parliamentary Commission on Banking Standards, the Governor said “There is a deeper problem for the banks themselves, and certainly for SMEs, and if you look at the banks, there is a clear distinction. The banks with the largest amounts of capital are expanding their lending. The banks which have bigger legacy balance sheet problems are contracting their lending. The reason why there is a difference between those two types of bank has nothing to do with the demand situation; it has everything to do with the position of the bank.” On the back of this, you requested that the PRA send a table that sets out this point “clearly and unambiguously”.

The chart below compares the major UK banks’ real economy lending growth in H2 2012 with their capital ratios using published data. The chart is based on FLS lending data for all but HSBC, which does not take part in the FLS. HSBC’s lending data comes from published accounts data.

As you can see, there is a positive relationship between banks’ published end-2012 Basel 2.5 capital ratios and lending growth in H2 2012.

16 April 2013