Bloomberg News

Banks Have Enough Capital to Lend Through a Recession, FSA Says

December 02, 2008

British banks should have enough capital after a government bailout to lend to consumers and companies through a recession, the financial regulator said.

The government bailout of 500 billion pounds ($751 billion) wasn’t just a short-term rescue and was intended to sustain lending, the Financial Services Authority said today.

“We don’t need, or would want, to force banks to lend -- that’s obviously a commercial decision for them,” Jon Pain, the FSA’s director of retail markets, said in an interview today.

“From our point of view we believe they’re adequately capitalized to be able to lend and cope with the stresses and strains of the economic downturn going forward.”

Prime Minister Gordon Brown stepped up pressure on banks last week to increase lending. U.K. mortgage approvals matched the lowest since at least 1999 in October as the financial crisis intensified, prompting banks to hoard money and curb loans.

“We’ve now got past the point where the government can put money in and leave them to it,” said Vince Cable, the Liberal Democrats’ spokesman on economic affairs, at a conference today where he and Pain spoke. “The government thought it could have the best of both worlds and it didn’t want to get in the business of deciding whether loans need to go to Bob the Builder or Pat the Plumber.”

Tier 1 Ratio

Banks that took part in the government bailout must have a so-called Tier 1 Capital Ratio, which is a key measure of financial strength mainly made up of shareholder equity, of 9 percent in relation to overall loans. Before the credit crisis, a Tier 1 of 6 percent was considered healthy.

Loans must remain on fair terms, and contracts that cover existing mortgages tracking the Bank of England’s benchmark interest rate must be in clear language otherwise or they may be unenforceable, Pain said.

Pain sent a letter to the heads of mortgage lenders last week, warning them to use repossession only as a last resort, and to prove customers are treated fairly or risk a penalty.

Tracker mortgages have come under scrutiny as the Bank of England may slash its base rate yet further this week. In some tracker contracts, there are so-called “floors” below which mortgages cannot fall even if the central bank decreases the benchmark interest rate.

To contact the reporters on this story: Caroline Binham in London at; Ryan Chilcote in London at

To contact the editor responsible for this story: Anthony Aarons at

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