Banks need to address funding gap

For Britain and America to start moving into a recovery, Britain’s banks need to address their funding gap and American house prices need to show signs of stability. This was the view expressed by David Smith, economics editor of the Sunday Times, at Fund Strategy’s Investment Summit.

The funding gap – that is, the difference between the amount of lending by British banks and the amount they raise from their depositors – reached a maximum of £740 billion in autumn last year, a figure Smith said has to be closed. “The banking system is still very reliant on the wholesale funding market [to fill this gap],” he said. “While this shouldn’t be moved back to zero, the Bank of England says £300 billion is more manageable.”

Meanwhile, despite recent positive data, Smith said American house prices are continuing to slide. Only when these prices stabilise will it be an indicator that things are heading in the right direction.

A rise in British mortgage approval rates, however, was one possible “green shoot of recovery”. Smith recalled the latest data on mortgage approvals, which showed a rise to 27,000, up from last year’s trough of 18,000. Interest from potential buyers has also increased.

Nevertheless, Smith said the extent of the British government’s borrowing is a concern. “Borrowing will soar to £118 billion next year, a figure which was unthinkable about six months ago. This will rise up to £300 billion in the next five years.”

Smith said the dive in world trade and a decline in industrial output were further worries, and added that two opposing forces are battling for the direction of the global economy and stockmarkets.

The first of these forces is the bad news, yet to come from the current crisis, which could continue to hit global economies. The opposite force is the bout of monetary and fiscal stimuli pumped into economies worldwide, and the time it takes for these to make an impact.

“Things are getting better and it is my instinct that over time, perhaps towards the end of this year, economies will improve and the markets will react ahead of this,” he said.