Analysis: Banks may struggle for funding but second bailout unlikely

Experts have raised doubts about a survey from think-tank New Economic Foundation that suggested the Britain may need a second bank bail-out.

The survey says that the bank funding gap is likely to increase from £12 billion to £25 billion by next year.

The latest Global Financial Stability Report published by the International Monetary Fund (IMF) yesterday, also warns that pressure on the banking sector has intensified.

The worsening outlook, the IMF says, has increased the risk of shrinking credit, slow growth and weakening balance sheets.

Banks were hit by the weak economy, poor new business flows, lingering bad debts and the withdrawal of government support systems, possibly generating the new for new taxpayer support of the system. (article continues below)

Jane Coffey, the head of global equities at Royal London Asset Management, points out that liquidity funding is different to capital funding. “The special liquidity scheme will be stopped in 2012, though the Bank of England may decide to roll it over. The original bail-out was to inject equity capital into the banks,” Coffey says. “Now we have had the final details of the Basel III regulations, which sets out the level of capital banks need by 2019. The banks have a long time to get to that level and the UK banks are already there.”

There are, however, some difficulties with liquidity funding. Analysts have suggested that Lloyds, for example, may need as much as £200 billion in wholesale funding over the next 12 months.

Julian Chillingworth, the chief investment officer at Rathbone Unit Trust Management, says: “All banks have an expectation of funding and how they are going to cope with that. The Bank of England has said that the emergency funding window will be closed by the end of 2011 and banks will need to sort themselves out by then.”

Chillingworth says that it is likely to become clear in the next three months whether banks will struggle to raise wholesale funding, adding: “It does depend on everyone playing the game. But it is unlikely we would move back to where we were three years ago. Banks may look for alternatives means of funding and may be more imaginative in their debt issuance.”

He says it may be a problem – with Lloyds and Bank of Scotland the most vulnerable – and that it is something that well-informed investors are watching closely. Coffey says that there could be problems if there was a significant recession, but while it would raise the cost of funding for the banks, it is unlikely to require further investment by taxpayers.