BANKS MOVE SLOWLY TOWARDS TIGHTER CREDIT based upon Financial Times article
Ed. note: Lombard is a regular and authoritative contributor to the Financial Times on financial questions. In dealing with this complex question he confirms the fears of many that this winter will see, arising from the balances of payments position, powerful pressures for a doymturn in the British economy, thus facing the newly elected government - Labour or Tory with severe economic problems. The article reads:
“Although it is still true to say that nothing in the nature of a fullblooded oldg-time credit squeezeis in prospect, the U.K. banks are slowly giving a rather more stringent character to their lending arrangements =:.notably by by extending to other classes of borrower in watefF-down form the rationing system applied a short time back to those seeking finance for property development. And since the authorities have recently drawn attention to the need for the business system to avoid wasting the country's resources at the present juncture by holding excessive stocks, it can be taken for granted that one of the principal aims of the new policy will be to achieve economies wherever possible in the use of crédit for this purpose.
"When official concern over the possibility of the economy becoming over-=heated was signalised by the 1% increase in Bank Rate at the end of February; bankers expressed fears that their lending activities might be subjected befor the year was out t Soib8i $8 straining pressure of a call by the Bank of England for them to make aot E ites .(but) most bankers seem to have interpreted recent official prmouncements on the economic situation to mean that the authorities no longer feel that the country is exposed to the danger of serious over strain at home and that they are also satisfied that such disequilibrium tendencies as do exist are not attributable to excessive credit creation by the banking systeme.ee(however), after a slow down in the closing months of last year, the offtake of advances from the banks has been proceeding in recent months almost as fast aS any time since the credit squeeze came off two years aAGOseeeThe trouble is that, while welcome -enough for the benefit it confers on earnings positions, this upsurge in lending is leaving the banks more and more exposed in the structural sense. In the first place, the margin by which their liquidity ratios exceed the new and reduced official minimum of 28% is now not so large in most cases that they can count upon it being sufficient to enable them to deal with the seasonal run down in liquid assets due to begin in a little over three months time without embarrassment - if, that is, the rise in lending figures continues to accelerate.
",..2at the moment..many of the banks have arrived at the point at which the proportion of their deposits represented by their next line of defence after liquid assets = Government securities - is considered to have fallen about as low as it ought to be allowed to go, And = on the assumption that special assistance was not going to be available - the only way in which they could prevent their liquidity ratios drépping below the official floor during the seasonal stress phase if margins built up for the purpose proved insufficient would be by further redueing investment holdings. The banks are, in short, coming under a two-way stretch, so to speak on the ratio fronts. hat this means in practical terms is that borrowers in general are going to be Idable to encounter rather more resistance from their branch managers when making requests for additional credit than they have done during the past year or so. But this generally gentle constraint is quite likely to be selectively more severeseee"