Bank of England warns of second credit crunch

The latest credit survey reveals lowest lending confidence amongst banks since the end of 2008.

by
Last Updated: 31 Aug 2010

Just when you thought it was safe to go back into the red, the spectre of the credit crunch maybe about to make a very unwelcome return. The Bank of England Credit Conditions Survey for the second quarter of the year reveals an alarming change of mood amongst the nation’s lenders, with widespread indications that credit for both businesses and households may be about to tighten significantly. Oh joy…

A balance of 11.4% of banks said that they expect to lend less in the coming quarter than they did in the last. Given that the survey also paints a pretty dismal picture of Q1, that’s really not good news.

Business lending seems to be taking a particular hit - three months ago nearly a quarter of lenders reported that they expected commercial lending to rise, but the latest figures show that only in 7.1% of cases was that expectation fulfilled. That’s the lowest rate of lending growth since the dark days of October 2008, the month after Lehman’s went bust and the banking system teetered on the brink of collapse.

Lending to households is also expected to tighten, with mortgages becoming scarcer and requirements more stringent. Coupled with the news from the usual  survey suspects recently that house prices are flatlining and it seems that for the property market the brief summer may already over. Oversupply, with demand restricted by poor availability of finance, is a recipe for falling prices once again. Still, good news if you’re a cash buyer.

What’s going on? Partly it’s the impact of the end of Quantitative Easing, and partly fears over the Euro and possible Sovereign debt crises prompting banks to hang onto their spare cash rather than lending it to other banks. And if the banks are paying more to borrow, you can bet that they are lending less and expecting a bigger return, to boot. Three month Libor (the wholesale lending rate which caused Northern Rock so much grief - remember that?) has risen to its highest level since last September – 0.718%.

All of which raises another thorny macro-economic question – what’s going to happen to interest rates? Given that the base rates are currently at an historic low, common sense tends to suggest that they will rise sooner or later, but experts don’t necessarily agree. Surprise surprise, there is a huge spread of opinion amongst economists (when was it ever otherwise?), with predictions varying from imminent and steep rises on the way to a new era of permanently low interest.  Hmm.

The consensus seems to be that the emergency budget has made rate rises less likely in the short term at any rate. But as far as credit is concerned, the base rate doesn’t really matter. If banks don’t want to lend to each other, then it rapidly gets pretty hard to borrow money at any price. Have a thrifty weekend…

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Bank of England warns of second credit crunch
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