Banks making it harder and more expensive to borrow money is likely to have been the dominant factor behind a fall in lending to households and businesses, according to the Bank of England.
In the Bank’s Quarterly Bulletin it makes its strongest claim to date that the fall is down to a reduction in supply rather than demand.
The bulletin says: “The weakness in bank lending since mid-2007 reflects a combination of tighter credit supply and weaker credit demand. Qualitatively tight credit supply is likely to have been the dominant influence.”
Net lending to the non-bank private sector has been falling for most of the past two years, after growing an average of 10 per cent a year in the previous decade.
A report in this morning’s Financial Times says recent research by the Bank of England suggested as much as a third of the spread in mortgage and unsecured lending to consumers over the policy rate could be a result of lenders deciding to increase their profit margins helped by a lack of competition, rather than higher funding costs or increased credit risks.
The bulletin says: “Independently weak demand would typically be associated with lower spreads on loans, rather than higher spreads.”
The findings contrast with claims from the British Bankers’ Association that credit is available and that the increased cost is down to a correction in the pricing of debt.
The bulletin says: “There is some evidence credit supply conditions have improved somewhat since the peak of the crisis, especially for large companies with access to capital markets, constrained credit supply continues to be one of the main factors holding bank the economic recovery.”