British Banks to Cut Credit
Big changes for our neighbors to the east. Bloomberg is reporting that UK banks are modifying their lending practices so as to reduce the amount of credit available to businesses. Here’s an excerpt:
U.K. banks will reduce the supply of credit to companies “significantly” in the fourth quarter as they tighten loan conditions and respond to higher market borrowing costs, the Bank of England said.
The central bank said its new quarterly survey of lenders showed a net 49.3 percent expect to cut credit supply in the next three months compared with 20.2 percent in the previous quarter. The figure tracks the percentage of lenders forecasting tighter lending conditions subtracted from the number who see looser terms. The responses were collected from Aug. 20 to Sept. 13.
Commercial lenders’ reluctance to extend credit raised the cost of borrowing between banks to a nine-year high Sept. 11, forcing Northern Rock Plc to seek emergency funding and prompting a run on its deposits. Tighter lending terms may crimp business investment, adding to the case for lower interest rates.
“Tighter lending conditions will help to slow activity and may lead to deteriorating financial health of U.K. businesses,” said James Knightley, economist at ING Financial Markets in London. “We were already expecting two rate cuts next year, and now we may see a third as well.”
Such cuts in business lending may lead to a recession as businesses find it harder to hire more employees and expand. Increased unemployment will make it harder for everyone to pay off mortgage loans and may lead to an increased housing downturn.
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