Britain's biggest banks will warn the chancellor that up to £1tn is poised to be drained from the financial system, hampering economic recovery and depriving households and businesses of loans and other forms of credit.
The bank bosses wrote to George Osborne shortly after he took office are to meet him to express their concerns about the impact of regulatory changes which require banks to hold bigger capital cushions. These changes are coming at the same time that the Bank of England withdraws liquidity schemes designed to help banks during the financial crisis.
The banks, through the British Bankers' Association (BBA), intend to tell the chancellor that when the Bank of England pulls the plug on these liquidity programmes some £400bn will be withdrawn from the UK's banking system. The schemes were put in place to help get money flowing between banks after the credit crunch, but are due to end in 2012.
The banks have also calculated that demands by international banking regulators in Basle that they bolster their capital will require the UK's banking industry to hold an extra £600bn of capital that might otherwise have been deployed as loans to businesses or households.
The banks are drawing on research conducted by PricewaterhouseCoopers, some of which was used to appeal to G20 leaders ahead of last month's meeting to delay regulatory changes, in setting out their concerns to the chancellor. The research claims that two percentage points would be sliced off UK economic growth because of proposed regulations, driving the country into a double-dip recession.
At the June G20 meeting, the leaders appear to have heeded the lobbying efforts of banks by slowing down the implementation of the international rules and giving individual governments the responsibility of introducing the plans at their own speed.
While this delay has helped to alleviate some of the most pressing concerns, the industry is still determined to air its fears about the dramatic withdrawal of funds from the economy in the coming years.
It is also expressing its concerns to Vince Cable, the business secretary, who is in discussions with banks about ways to stimulate lending to businesses, particularly small and medium-sized enterprises, and generate growth for the economy.
The chancellor, while prepared to listen to the banking industry, is determined to push through regulatory changes, such as the new bank levy. Osborne is also convinced that the banks should work with the government to ensure that credit gets through to businesses and households even while regulatory changes are made.
The Bank of England, for instance, has calculated that banks could free up £10bn of capital to support £50bn of lending by restricting bonuses and cutting dividends to shareholders.
But Osborne is also thought to have argued during the recent G20 leaders meeting that some delay was needed to the regulatory changes and is also prepared to discuss with banks ways of staggering of any reforms.
The banks are meeting the chancellor as the government prepares a green paper to thrash out some of the issues involved in getting loans flowing to businesses. In a recent speech, City minister Mark Hoban said that the paper – being published at the end of this month – would consider the "broad range of finance options" to businesses, including equity which is used by only 1% to 2% of small firms.
The government sees such lack of equity investment in small businesses as "missed opportunity" that should be explored along more traditional bank loans and overdrafts.
Neither the Treasury nor the BBA would comment on any upcoming meeting or the topic for any discussions.
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