Bank lending stalls; HBOS chiefs face the music

A new Bank of England survey reveals that less credit will be available to British businesses in the second quarter. Meanwhile HBOS bankers face a pasting over their part in its collapse.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

Businesses that have struggled to access bank credit recently should brace themselves for more bad news. The results of the latest Bank of England Credit Conditions survey has found that banks ‘do not expect to be more willing to lend’ in the next three months, despite an increase in demand.

The report also found that while the banks’ credit pipeline did pump cash into UK companies during the first three months of the year, it was at a slower pace than in the last quarter of 2012 – and mainly went to large businesses, not SMEs.

The findings drive another nail into the coffin of government’s Funding for Lending scheme. The initiative was launched to help encourage banks to lend to consumers and businesses by giving lenders favourable terms on the money borrowed. But so far, the FLS has been used primarily for mortgages, not to help companies grow.

Why have banks put the kibosh on lending? Headwinds from the eurozone, a depressed UK economy and weak sterling are all to blame, apparently. But Vince Cable will not be pleased that his wheeze is already running out of puff.

And, according to the Credit Conditions report, small firms aren't likely to get their hands on the cash any time soon, with banks slapping themselves on the back for reducing borrowing costs for households while saying that they expect a further tightening of loan spreads in the next three months.

This will put the screws on cash-strapped small businesses in the next quarter. But perhaps they will derive some comfort from the fact that the banks - and the bankers who run them - appear to be getting their comeuppance for getting the economy into this mess in the first place.

RBS is having a 'mare today after 12,000 of its shareholders clubbed together to sue the bank for £3.5bn in compensation. The investors claim that RBS deliberately misled shareholders into believing it was in good financial health just before it collapsed in 2008. They are also suing former top RBS executives, including ex-chief executive Fred Goodwin and former chairman Sir Tom McKillop, along with Johnny Cameron and Guy Whittaker, who were senior figures at the bank in 2008.

But they aren't the only bankers feeling the heat right now. Lord Stevenson, former chairman of HBOS, Sir James Crosby, who was HBOS chief executive up to early 2007, Andy Hornby, CEO for the following two years, and Peter Cummings, the former HBOS director who spearheaded a rapid expansion of corporate lending, all ran HBOS in the lead-up to its collapse in 2008. HBOS was created in 2001 from the merger of Halifax and Bank of Scotland and became one of the biggest disaster stories of the financial crisis: the total cost of bailing out the bank hit a total of £30bn.

The men are grimly awaiting to hear their fate following the release of a damning parliamentary report tomorrow. The Parliamentary Commission on Banking Standards is expected to prove that the bank’s failure was down to poor government and weak credit risk controls – basically, lay the blame squarely at the door of these – now infamous – four.

The report coincides with the Salz Review, commissioned by Barclays, which has been investigating the root causes of the Libor-rigging scandal last year. According to this report, there is something very rotten in British banking: 'cultural shortcomings' are to blame for the breaking down of ethical banking, it posits. Barclays chairman, Sir David Walker, says today that the review made for 'uncomfortable reading'.

The question is, how will the City’s new banking watchdogs (find out more about their new powers here) see fit to deal with the transgressors? MT will report on the fall-out from the investigation when the details are released tomorrow – it looks like Stevenson, Crosby et al will need their tin hats…    

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