Banks to need fresh capital next year, NEF warns

A report from the think-tank New Economics Foundation (NEF) has suggested that the banks may need a fresh round of state capital by 2011.

The report’s authors—Andrew Simms and Tony Greenham—say that the banks’ funding gap is likely to increase from £12 billion today to £25 billion next year, as stimulus measures begin to dissipate.

Simms says: “Banks are being affected by the general state of the economy and are not getting new business. They are also still carrying bad debt, plus the government support systems are being phased out. Overall the position looks very bleak.”

Simms adds that the banks have done little to change the underlying fundamentals of their businesses, though have shored up short-term profits through high margins on lending, which would be unsustainable in a climate of higher interest rates. (article continues below)

There are also ‘plot holes’ in the Bank of England’s reports on financial stability and the banks themselves have been weak on transparency. Simms adds: “It is extremely difficult on the basis of the information in the public domain to find out where the money has gone.”

The report points out that while the Bank of England has cut interest rates, interest rates for households and firms on many mortgages and other borrowing are higher than before the crisis. It remains difficult to see the ‘quid pro quo’ for taxpayers’ investment as new lending to households and firms has stagnated.

The report’s authors also found evidence that lending had continued to be skewed to less productive areas of the economy such as residential and commercial property, rather than support for industry.

The NEF called for four major reforms from the banking system: the separation of retail banking from speculative trading, and the curbing of socially unproductive financial activities; breaking up the big banks, reducing them to a size where the failure of one would not jeopardise the whole economy; the transformation of the bailed-out Royal Bank of Scotland into a Royal Bank of Sustainability, which would redirect its investment away from fossil fuels and towards building green infrastructure; and the introduction of a Community Reinvestment Act, which would bring transparency to banks’ lending and ensure they invest in all communities from which they take deposits.