British banks

THE latest review of British banks’ lending, released last Friday, is a bleak read. Annual growth in business lending has never recovered following the initial credit crunch (see chart). In fact, banks just marked a grim anniversary: thirty consecutive months of data showing negative lending growth (June 2009 to November 2011).

Lending figures are the outcome of loan demand from businesses, and loan supply by banks. If lending falls, which keeps happening, this could be because of lower demand, or lower supply, or (very likely) both. The latest survey data suggest a supply problem is playing a part, with firms saying that credit has become more costly, and harder to get, in recent months.

And the supply problem is getting worse, as banks’ funding costs – the rate they have to pay to borrow – kept on rising during 2011. One proxy for funding costs (CDS premia) was higher at the end of 2011 than in 2008. Much of the increase happened last autumn, and has not (yet) fed through to the cost of lending.

A deterioration in the cost and availability of credit is a risk to growth, according to the Office for Budget Responsibility's November 2011 forecast. And a credit tightening now looks likely: British banks expect that in the first quarter of 2012 credit to all sizes of firm – small, medium and large – is going to get more expensive. Britain’s credit crunch looks likely to get worse.