Bank lending will continue to drop

Based on current trends, lending from banks to businesses is set to drop by $429 billion by the end of the year, representing a decline of 4.6 percent. The decline is slower than that witnessed last year, according to the ITEM Club, who presented the figures, and there are apparently signs that the financial sector is beginning to enjoy a period of recovery.

Despite the slower decline – 2011 showed a lending drop of 6.1 percent – economists have cautioned against over-optimism, suggesting that lending levels would not return to those seen in 2008 until at least 2016.

The ITEM Club’s Senior Economic Advisor, Carl Astorri, said that SMEs would continue to ‘bear the brunt’ of the notable deleveraging across the UK, but did express his belief that this would be the last year where it would be quite so marked.

The British Bankers Association said last week that there was a drop in lending to non-financial businesses of approximately £1 billion back in September, as well as a fall in loans and overdraft figures.

The Government’s plans to increase lending for small firms have been described as inadequate by the ITEM Club. They believe the British Business Bank, who ITEM noted specifically, would have a capacity of £10 billion, which would run out in approximately half a year according to forecasters.

Bank of England figures show that high street banks lending to businesses was at £44.2 billion over the first quarter of the year, although over a third of applications were rejected. The ITEM club suggested that an extra £19 billion would be needed to bring this down to 11 percent, where it stood before the crisis.

The ITEM clubs economists thus remain uncertain about whether the £80 billion Funding for Lending scheme has the capacity for growth stimulation.