Lloyds and RBS boosted by new capital pledge to kickstart lending

By JAMES SALMON FOR THE DAILY MAIL

Updated:

Shares in state-backed lenders Royal Bank of Scotland and Lloyds soared yesterday on the back of assurances they will not have to hold extra capital against new loans made under the flagship ‘funding for lending’ scheme.

But one expert warned the Financial Services Authority is ‘playing a risky game’ by relaxing the rules, increasing the risk of more severe recessions in future.

The watchdog also confirmed that by the end of next year UK banks will not have to set aside 10 per cent of their assets as a capital buffer to protect against future financial shocks.

Sky high:The move sent shares in banks soaring

Sky high:The move sent shares in banks soaring

Instead banks will be given individual targets and have been told their capital reserves can drop below 10 per cent in the meantime.

The news that banks will be able to put the money to profitable use rather than setting it aside cheered investors.

 

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Lloyds (up 4 per cent to 38.48p) was the biggest riser in the FTSE 100 yesterday, with RBS (up 2.1 per cent to 262.7p) in second place.

Under the Government’s and the Bank of England’s £80billion ‘funding for lending’ scheme which kicked off in August banks are being given access to cheap funds as long as they lend more to the economy.

But there are concerns that capital requirements designed to cushion banks from another financial crisis will force them to continue to hoard cash rather than make full use of the new scheme.

Yesterday Dr Enrique Schroth of Cass Business School warned that by relaxing the capital restrictions the FSA could encourage banks to lend to customers who will be more likely to default on their repayments.

He said: ‘The incentives of banks to screen loan quality could decrease significantly if banks expect the FSA to relax capital requirements during recessions but leave them intact during booms.’

He warned that while lending may increase, this increase the chances of loans defaulting, and causing more severe recessions in the future.

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