Banks face strife after bailout ends

By SAM FLEMING FOR MAILONLINE
Updated: 20:38 EST, 9 March 2010

Britain's banks may struggle to stand on their own feet as they are weaned off public sector support, according to an alarming pair of reports.

Debt analysis firm Moody's warned the wind-down of the government's bailout packages could trigger a series of downgrades to firms' credit ratings - driving up their cost of borrowing.

Separately, analysts at Credit Suisse estimated the UK's banks will have to raise as much as £750bn of finance in just three years to keep their balance sheets in shape and comply with tougher regulations.

Weaning pains: The wind-down of government support could trigger downgrades to credit ratings

If, as seems likely, they are unable to do this, some banks may have to rein in their lending and shrink their balance sheets, dealing a potential blow to Britain's recovery.

Top UK lenders remain hooked on financial support schemes that are worth close to £1 trillion, or nearly the entire annual output of the UK economy.

But a significant share of this is set to be withdrawn as the Bank of England and Treasury attempt to return to more normal policy footings.

The authorities in the eurozone and the US are looking to do the same as financial market strains ease.

The Bank's £185bn Special Liquidity Scheme and the £250bn debt guarantee scheme are both due to be phased out starting next year, for instance, and governor Mervyn King has repeatedly signalled his determination press ahead with the withdrawal.

On top of this, the BoE has put its £200bn Asset Purchase Scheme - also known as quantitative easing - on hold.

QE has helped the UK banks by flooding them with freshly minted reserves, but it is likely to be reversed as and when the recovery gathers pace.

Jonathan Pierce of Credit Suisse said: 'What happens now QE has stopped? Quite simply, we think it will make it harder for banks to improve their balance sheets in 2010, and of course when QE reverses the strain will build further. This is unfortunate because there is plenty of work for banks still to do.'

Shares in the country's biggest financial basket cases - Lloyds Banking Group and Royal Bank of Scotland - both declined. Lloyds lost 0.47p to 53.18p, bringing its six-month decline to 25 per cent. Royal Bank of Scotland's six-month decline hit 32 per cent, as the stock shed another 0.49p to 38.98p.

The pound dived below $1.50 against the dollar during the day as a dire set of economic figures dented Britain's recovery hopes.

The Office for National Statistics reported a 6.9 per cent monthly slide in exports in January - the largest fall since July 2006.

The overall trade deficit widened by almost £1bn to a 17-month high of £8bn in January.