Lend and hold more capital – are we asking too much of the High Street banks?

28th March 2013

Whether it is really in the interest of the country or not, banks look set to be bashed for quite a long time to come. But perhaps more importantly, they also face conflicting demands. Put simply, we want them to be profitable, to lend to businesses and individuals, to have a stable capital base so they never threaten the economy or need a bailout again, to return all money owed to the state and to provide employment for the population and revenue for the economy. It is quite a list.

But this week, we saw just how contradictory those demands are. The Chancellor of the Exchequer George Osborne found himself before a committee of MPs having to defend his new Help-to-buy scheme from accusations it could lead to a new house price and mortgage boom and leave either borrowers or the Government on the hook for new mortgage liabilities.

It was, of course, the correct question to ask and it is no surprise it was asked by the “other shadow Chancellor” Andrew Tyrie, the Conservative chairman of the Treasury select committee. The Telegraph reported on the exchange. As the paper reports: “The Chancellor defended his policies when chairman Andrew Tyrie asked if he was “not concerned that we are just ploughing money back into the boom-bust property cycle?”.

“Mr Osborne replied: “I don’t detect that we are in the middle of a housing boom. I think we are in a very unusual situation after the financial crisis.”

We should give thanks for Mr Tyrie and his forensic questioning about the issue, sadly lacking from the House of Commons mortgage debate. We might ask is this because both governing and opposition parties are responsible for their own housing booms in the past two decades. But just how likely is a return to the good old, bad old days?

The very next day the Telegraph reported that the Bank of England Financial Policy Committee, set up to spot and avoid the next financial crisis before it happens, wants the big banks to hold £25bn more in capital.

Those banks may not be the sole providers of mortgage finance, but even the building societies and smaller banks are facing their own capital challenges.

Of course, some of this capital may come from lower bonuses and smaller dividends – something for investors to watch out for – but it will surely encourage banks to restrict lending and favour lower risk and less capital intensive low loan to value lending.

Certainly on mortgage finance, it is not clear the Chancellor and the Financial Policy Committee are on the same page. And while not suggesting that anyone should feel sympathy for banks, maybe it is impossible for them to satisfy all the demands placed upon them.

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