The Deadline for Repaying Bank Bail-out Money Implies Continued Pressure on Business Lending

Copyright (c) 2011 Alison Withers

The deadline for British banks of 31 January 2012 for repaying the money made available to them by the Bank of England since April 2008 through its Special Liquidity Scheme, the support that was provided following the temporary public ownership of Northern Rock in the UK, the collapse of Lehman Brothers in the US and the onset of the global economic recession.

It has to be asked where this money is going to come from,and the likely answer is from business and customers. While banks are likely to borrow some money via issuing corporate bonds in the marketplace it is unlikely there will be much inter-bank lending.

So it is reasonable to assume that banks will make up the difference by withdrawing money from the marketplace, that is from businesses and individuals from repayment of loans and overdrafts. While reducing existing loans it will be difficult for banks to find additional money to lend and businesses and other borrowers will find agreeing loans hard, and even if successful, are likely to find that repayment terms will be stricter and more costly.

The amounts involved are almost too big to imagine. The amount due to be repaid is £185 billion which is similar to the combined value of the UK's four leading banks (LloydsTSB, Barclays, HSBC and RBS).

At the same time the banks know they face tighter regulation on lending and capital reserves under new regulations, called Basel III, from the world's banking regulator.

Under the new rules Banks will have to increase their core tier-one capital ratio (shareholder capital) to 4.5% by 2015. Also they will have to carry a further "counter-cyclical" capital conservation buffer of 2.5% by 2019. Any bank that fails to meet the new requirements is expected to be banned from paying dividends to shareholders until it has improved its balance sheet.

To meet these new requirements banks will require to raise substantial amounts of fresh capital placing further burden on the lending market.

At the same time the Government has now introduced a series of measures, including a rise in VAT, higher National Insurance Contributions and public sector cuts, aimed at reducing the country's budget deficit, caused in part by the need to prop up the banks two years ago to prevent the recession from turning into a depression.

It is hoping that the private businesses will be able to grow and to create jobs to absorb the expected rise in unemployment.

But the bulk of businesses on which the economy depends are small traders and entrepreneurs and if they are experiencing a combination of higher costs and tightly restricted lending businesses rescue advisers say they cannot plan for growth and increasing the profits they would need to be able to expand and in fact should be focusing on cash management and cash flow in order to survive.

Turnaround advisers suggest that many businesses may also need to revisit their business model and look for efficiency savings in order to protect themselves to be lean and fit enough to continue to trade without risking insolvency.

It is difficult to see how it will be possible to avoid a long gentle decline these circumstances, when the fact is that the banks must find the money for repayment somewhere. As for a double dip recession!


------

The repayment deadline that British Banks have to meet in January 2012 for repaying the money the Bank of England made available to them via the Special Liquidity Scheme suggests that lending will remain restricted while they try to raise the capital they will need, Ali Withers learns from rescue adviser Tony Groom of K2 Business Rescue.