Net lending in the UK was broadly flat in the second half of last year up modestly in the remainder of this year. This compares with an expectation prior to the launch of the Funding for Lending Scheme that net lending would decline over last year and this. I emphasise this point because the record of the first year of FLS needs to be judged against a worse outlook for lending a year ago. Net lending to large businesses remains weak, but these companies tend to have access to alternative sources of external finance, such as corporate bond markets and such bond issuance has been very strong so far this year, more than double the quarterly average precrisis. Small and medium-sized enterprises are more reliant on banks for external finance. Survey evidence suggests some improvement in the pricing of loans to small firms, but applications for credit have not yet picked up, and net lending to SME’s remained negative in the first quarter of this year. Survey evidence suggests that both lenders and borrowers expect an increase in firms’ demand for loans. This is the pattern also seen by firms surveyed by the Bank of England’s regional Agents. But, the extent of any increase will depend on the macroeconomic outlook, as well as the perceived reliability of bank credit as a source of finance.
At that time, the FSA eased banks liquid asset requirements following a recommendation from the FPC, and also the FSA relaxed capital requirements on eligible net new bank lending as part of a deliberate set of actions to combine the objective of resilience with supporting activity in the economy. Since then, the focus has been on the capital of the banks more than anything else. The FPC has recommended to the PRA that it should seek to establish a minimum level of capital on the final Basel 3 measure of at least 7% after taking account of three issues, namely uncertainty around asset valuation in more vulnerable portfolios, possible future conduct of business costs, and aggressive use of risk weightings. A further test is to consider whether banks are making acceptable progress towards the Basel 3 minimum leverage ratio (leverage is a simple concept in many respects, but it is confusing in one respect, namely that you might – but Basel doesn’t – describe this as a maximum leverage ratio). The PRA is in discussion with the banks on the issue of capital. I read a lot on this most days of the week. Let me make a few points. Many commentators and journalists have worried publicly that these recommendations will lead to lower bank lending. I want to reassure you, that is not the case. Capital is not money that has to be stashed away for a rainy day. Essentially, it is the shareholders’ stake in the company.