Liquidity squeeze puts recovery at risk

Liquidity-squeezeBritain's Treasury Select Committee has raised concerns that new regulation will limit bank liquidity and hamper the economic recovery.

Andrew Tyrie, its chairman, has written to the Bank of England and the Financial Services Authority highlighting “the negative impact that a squeeze on bank liquidity is having on banks’ ability to extend credit to support the economic recovery”.

His letter addresses capital and liquidity requirements for banks, including Basel III, and raises questions over the quantitative easing programme.

“Pressures [on the banking system] are now compounded by the effects of the euro area sovereign debt crisis which has made it harder still for banks to find stable funding,” Tyrie writes. “Bank credit in the UK contracted by 7% in the year to the end of August.”

He warns the squeeze on bank liquidity is increasing the risk of continued credit contraction, setting back the prospects of economic recovery.

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