Saturday, March 17, 2012

Breedon Task Force concludes that alternatives to banks needed to fill credit hole

The Telegraph reports that according to a government task force led by Tim Breedon, the chairman of the Association of British Insurers, urgent action is needed to fill the 'credit gap' between what businesses need in additional credit and what banks can provide because of balance sheet constraints.

Readers know that the balance sheet contraints on banks is the direct result of the financial regulators setting a 9% Tier I capital ratio target.

Prior to the financial crisis, this gap would have been filled by structured finance.  But the structured finance market is not able to fill the credit gap today.  This market is experiencing a buyers' strike as investors wait until the necessary reforms, like providing observable event based reporting, take place.
Pressure on banks to reduce risk and improve their capital bases will lead to a “significant funding shortfall” unless non-bank finance channels are opened up to small and medium-sized companies, Mr Breedon, chief executive of Legal & General, warned. 
Mr Breedon said: “Banks cannot continue to manufacture for SMEs the cheap widely available credit of a few years ago, as some seem to want and expect them to do, while absorbing higher funding costs, and complying with the liquidity requirements and capital changes now required by regulators. 
“As business confidence and growth returns ... continuing bank deleveraging is likely to leave a significant funding shortfall”.

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