Continued trouble in the eurozone will lead banks to reduce their balance sheet assets to increase capital reserves, which will result in reduced lending, according to Home Funding chief executive Tony Ward.
Last week, European leaders agreed a debt deal to solve the sovereign debt crisis engulfing eurozone nations but 10-year bond yields in troubled eurozone nations have continued to rise, reflecting the market’s lack of confidence in the bail-out plan, particularly given news of a Greek referendum.
Ward says banks will now look to bolster their capital reserves to withstand future shocks by reducing their balance sheets and lending less.
He says: “What we are seeing in Europe is going to lead to the deleveraging of balance sheets picking up pace to bolster capital reserves. They can only really do that through three mechanisms issuing more equity, retaining more profits or reducing assets held on balance sheets.
“Certain banks are going to have to drive down their balance sheets quicker than others if they are not to call on more government bail-outs. Lloyds and RBS spring to mind in terms of UK banks. I think this will result in banks lending less.”
Industry consultant Jonathan Cornell says: “Banks are going to need to make some fairly strong changes to the way they are structured so it looks as if they will need to reduce levels of lending, which will have a negative effect on all of us.”