LONDON (Reuters) - Pressuring British banks to lend out more money will lead to a rise in defaults while creditworthy firms and households are reluctant to borrow, a Bank of England financial regulator said on Tuesday.
Michael Cohrs, a member of the central bank’s new Financial Policy Committee which draws up regulation for the financial system as a whole, said it was rational for companies and households to reduce debt levels when the economy was weak.
“If we push too hard on the lending theme, we will simply raise default levels, as more of the borrowers will not be creditworthy,” he said, according to the text of a speech he was due to deliver at the University of the West of England in Bristol.
“There is no silver bullet to quickly fix the current economic situation,” he added.
Britain has not fully recovered the output lost in the wake of the 2007-09 financial crisis, which has left many Britons poorer and forced the country to bail out big banks with tens of billions of pounds of taxpayers’ money.
Meanwhile, banks’ reluctance to lend, alongside the euro zone’s debt problems and government austerity measures, is holding the economy back.
In a bid to get credit flowing to families and businesses, earlier this year the Bank launched the Funding for Lending Scheme, designed to lower banks’ funding costs in return for more lending.
But Cohrs warned that borrowing too much money, whether by a financial institution or a company or a household, “is a depressingly common cause of financial crises”.
He also said that for him, the big issue facing the regulation of financial firms remained the problem of some banks being too big or too important to be allowed to fail.
“I think more urgency is needed on this key problem,” he said, suggesting four steps, including accepting that shareholders and debt holders should suffer losses when a financial company goes into receivership.
If the managers of financial companies cannot explain the benefits of being big and global, regulators should consider penalties or taxes on the largest banks to create “insurance funds” to be used if an exceptionally large financial firm fails and to create an economic incentive to downsize, he added.
For the full speech, click here