BOE Carney Says Businesses Have Gotten Funded by Alternative Sources Which Could be a Risk

A repeat of the 2008 financial crisis could require the Bank of England to rescue trillion-dollar financial markets because business lending has shifted away from traditional banks, the BoE governor Mark Carney has said.

Speaking at a gathering of central bankers in Paris on Friday, Carney said a structural shift away from bank lending meant markets for bonds and derivatives could come under pressure in a repeat of the crisis and could need the support of central bank funds.

Tighter regulations imposed on banks had raised lending costs and encouraged businesses to seek loans from other sources, he said. But while reducing the dominance of bank lending was a positive step, it could mean Threadneedle Street extending its sphere of influence to protect financial markets from collapse.

Central banks have come under increasing pressure to make sure that the next crisis in the banking sector can be handled without a taxpayer-funded bailout. A series of regulatory reforms, including demands that banks hold greater reserves and conform to strict lending rules, have reduced the risk that taxpayers will need to fund a rescue of the sector.

 
But Carney conceded that the job was not yet complete. He said: “The implicit [taxpayer] subsidy to banks has come down substantially but not been eliminated. We are still working to end ‘too-big-to-fail’.”

A rise in banking funding will mean that the sector will need to charge a higher rate on loans than before the crisis. For this reason, Carney said the central bank will need to cap the interest it charges banks at a historically lower rate than in the years before 2008.

The Bank has already signalled it expects base rates to rise over the next two to three years to a maximum of 3%. Such are the new regulatory costs of running a bank that they will need to limit the amount they lend and charge a higher premium on loans.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza