Will bank lending finally start to rise?

January 7, 2013

Big news over the weekend was the world’s banks being given an extra four years to build up their cash piles, and given more flexibility about what assets they can throw into the pot. This is a serious loosening of the previously planned regime and could have a significant effect on banks’ willingness to lend and therefore the wider economy.

For over two years, banks have complained that they can’t oil the wheels of business investment and consumer spending while being forced to build up much larger capital reserves to ward off future financial crises. That contradiction has now been broken (a big win for the bank lobbyists) and the impact on economic recovery could be profound.

However, there are no guarantees. Banks, in Europe at least, have also insisted that lending has remained low because there isn’t the demand for credit from business and households. If that’s true, increased willingness to lend might not be snapped up.

The uncertain economic state of play means the European Central Bank and Bank of England are unlikely to act at policy meetings later this week.
Safe haven German Bund futures have opened moderately higher having dropped dramatically last week after Washington navigated its way round the fiscal cliff and U.S. data was markedly upbeat.

The global regulators, meeting in Basel, agreed on Sunday to phase in a rule new rule on minimum holdings of easily sellable assets, known as the liquidity coverage ratio, from 2015 over four years, and widen the range of assets banks can put in the buffer to include shares and retail mortgage-backed securities (RMBS), as well as lower rated company bonds.

The latter is just as important as the relaxed timeline and could kick-start the mortgage-backed securities market which has been hammered since the U.S. subprime mortgage collapse which sparked the world financial crisis of 2007-2009. The market is particularly critical to the United States, less so in Europe.

Over the new year, Egypt and its currency crisis has commanded attention. On Sunday, the central bank took some of the sting out of it by reporting foreign currency reserves were barely changed in December. On the foreign exchanges, the pound has dropped about four percent over the last week and president Mursi fired his finance and interior ministers over the weekend. Today, talks with the IMF’s representative are due to start on a postponed $4.8 billion loan agreement. Mursi is likely to take personal charge.

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