The Bank of England is due to take over full regulation of the banking sector

24 October 2011 Last updated at 08:27

http://www.bbc.co.uk/news/business-15426402

New rules on banks are making it more difficult for them to lend, according to the chairman of the UK’s Treasury Committee, Andrew Tyrie.

Mr Tyrie has written to the Bank of England and Financial Services Authority asking them to investigate the impact of the new regulations.

Mr Tyrie warned that the eurozone crisis was already making it harder for banks to raise funding.

The regulations may hit lending and damage the recovery, he warned.
Falling credit

The letter was sent to the governor of the Bank of England, Mervyn King and the chief executive of the Financial Services Authority, Hector Sants, on behalf of the Treasury Committee.

It said investors had put banks under pressure to implement new rules forcing them to hold more capital, the Basel 3 agreement, well before the regulations come into force in 2015.

In addition emergency funding, provided during the financial crisis, was being withdrawn.

The letter said these changes were compounded by the eurozone sovereign debt crisis and had resulted in a 7% drop in bank credit in the year to August – according to figures from the Bank of England.

“The squeeze on bank liquidity is running the risk of continued credit contraction setting back the prospects of economic recovery,” warned Mr Tyrie.
‘Liquidity squeeze’

The bank’s latest round of injecting credit into the economy through quantitative easing would “do little” to increase funding for the banks, the committee warned.

He suggested the Bank should suggest look at other ideas to relieve what he called the “liquidity squeeze”.

In September, the Bank of England’s financial policy committee called on banks to cut staff bonuses and shareholder dividends to save cash.

With powers expected to transfer from the Financial Services Authority to the Bank of England Mr Tyrie called for regulators to ensure there was not a gap in supervision.

However, the committee admitted the Bank may already be taking action in private.

“We readily accept that many of the actions you are taking may, for the moment, need to remain confidential,” wrote Mr Tyrie.

He added that they would want to scrutinise the decisions at a later stage.

Bank governor Mervyn King is due to appear before the Treasury Committee on Tuesday to answer questions about the bank’s latest round of quantitative easing.

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