UK Lenders Ought to Cut Lending by £500 billion

Last week the Bank of England declared that UK banks might need to cut their lending by £500 billion within 4 years as the Governmental support will be withdrawn. The report on financial stability published by the Bank on June 26th suggests that the widening financial gap of British lenders coupled with the reduction in the Bank of England’s assistance will mean that lenders will be obliged to look for additional sources of funding. According to the central bank, some of the shortfall was met as the banks have sold their debt, which was backed by the governmental Credit Guarantee Scheme that amounted to £250 billion. The balance sheets of British banks have significantly grown in the past years; for instance, the balance sheet of the Royal Bank of Scotland Group has reached £2.4 trillion in 2008 – the figure exceeds the one of the UK economy as a whole. At the moment, the UK Government possesses the major share of the RBS Group and 43% of the Lloyds Banking Group. Analysts are determined that the Government’s plans on the increased banks’ lending towards the population are in controversy with its requirement to cut banks’ lending by £500 billion. However, the Bank of England is confident that the measure is a must. In 2008, the difference between banks’ lending and deposits was constantly growing and reached as much as £800 billion with almost 50% of the amount being backed by residential property securities. The Lloyds banking Group is expected to be hit the hardest as it mainly relies upon the wholesale funding. Another important change, which is reflected in the Bank of England’s report, is associated with financial institutions that act like banks. The Bank of England wants these organizations to be treated and regulated as banks.