• Text size      
  • Send this article to a friend
  • Print this article

BoE chief urges banks to raise more capital

Big banks are well-funded for business and mortgage lending but the Scottish banks still need to raise more capital, Bank of England (BoE) director Paul Fisher has said on a visit to Scotland.

AGAINST THE TREND: Bank of England director Paul Fisher has repeated his call for more quantitative easing on a visit to Scotland. Picture: Mark Mainz
AGAINST THE TREND: Bank of England director Paul Fisher has repeated his call for more quantitative easing on a visit to Scotland. Picture: Mark Mainz

He also repeated his call for more quantitative easing in the face of business opposition.

Mr Fisher, the BoE's executive director for markets, said in Glasgow that the UK Government's Funding for Lending Scheme (FLS) was having a major impact.

He said: "We have contributed to a dramatic reduction in bank funding costs that has meant loans for mortgages and to businesses are typically 1% cheaper than they were.

"The big banks are saying it has been a powerful influence on their funding costs ... but they say they are struggling to find businesses to whom they are willing to lend.

"In part this may be because their credit assessments are still being too severe, that is a matter to look into."

Mr Fisher said the banks expected "a reasonably big expansion of lending" by the end of this year.

However, he added: "I am not quite as optimistic ... but I would expect lending to go up."

He said FLS had "worked so well" that the big banks no longer needed to borrow through it, but smaller institutions and challenger banks were now gaining access to it.

However, Scotland had a "particular problem with lack of competition", Mr Fisher admitted. He said the BoE's financial policy committee had been tackling that by encouraging banks to hold more capital, which would enable greater funding rather than constrain it.

He said: "We want UK banks to be seen as the strongest, most resilient banks there are. That should make them better able to support the UK economy."

For the banks raising more capital was "not terribly popular because in the short-term they can make more money by not doing that".

In recent meetings of the nine-strong MPC, Mr Fisher has sided with bank governor Sir Mervyn King in a 3-6 minority in favour of further quantitative easing (QE), a step opposed by business leaders as liable to weaken the pound, stoke inflation, and endanger growth.

Mr Fisher said: "My view is we need some sort of background level of QE to see us through this period, particularly while FLS has its full impact for the remainder of this year."

Beyond that, Mr Fisher said, "I don't know whether it would have a huge impact".

Scotland, he said, had a remarkably diverse economy, and it was notable that "in Glasgow unemployment is twice as high and house prices half as high as in Edinburgh".

Mr Fisher added: "We have the most expansionist monetary policy in 300 years ... the question is do we do a little bit more or not, when you have already done so much and the economy is where it is?"

There were, Mr Fisher said, "glimmers of hope" after two years in which the UK economy had "basically been flat". Weak growth in services and manufacturing had been held back by the North Sea and construction sectors.

He said: "I expect North Sea oil at least to bottom out shortly and possibly start increasing and construction to be no worse than flat – that would in itself lead to some pick-up in GDP numbers."

On the criticism from pensions campaigners that QE has hammered retirement

savings, Mr Fisher said: "The recession has hit the vast majority of people, not specifically savers or pensioners.

"We have done some work on the effects of QE on pensioners, and if you have had a pension throughout linked to the price index you have probably done better than most workers... pensioners as a group have done relatively well."

Real savings rates were negative because "you can't expect to earn risk-free real rates of return in an economy where there is no growth".

On the MPC's new "more flexible" remit from the chancellor, Mr Fisher said the committee would respond in the context of the August inflation report, in the early days of new BoE governor Mark Carney.

But he warned: "There are limits to what monetary policy can do. Nobody has actually given us any new toys to play with in terms of trying to promote the economy."

Contextual targeting label: 
Finance

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

150925