CBI warns of risk to growth as banks plug £25bn hole

The Bank of England’s Financial Policy Committee (FPC) recently said lenders must plug a £25bn capital shortfall as they face a potential £50bn hit over the next three years from eurozone shocks, bad debts and mis-selling scandals.

But business lobby group the CBI said capital buffer increases must be carefully timed so vital cash is not sucked from the economy just as growth looks to be picking up.

CBI director general John Cridland made the comments as the group confirmed forecasts for the UK economy to grow by 1 per cent this year, before accelerating to 2 per cent next year.

Growth in business investment is expected to be just 3.3 per cent this year, reflecting caution among companies while the global recovery remains precarious.

Mr Cridland said forcing lenders to build capital buffers too fast means they are “less able in the round to support business users of finance”.

He added: “I would not front-load the capital requirements. The banks are saying there’s a tendency to push too quickly on capital buffers and that’s holding back money that could be spent on new products.

“The timing of capital requirements is a very material part of the contribution they can make to the economic growth.”

Lenders have been told to bolster capital reserves since the financial crisis froze money markets and forced bank bailouts.

Regulators are expected to order banks to fill the £25bn capital hole by the end of the year.

But Mr Cridland called for UK regulators to apply consistent rules on bank capital, in line with other global regulators, adding: “There’s been a tendency since 2007 for policymakers to do more than has been required.”

The UK economy grew by 0.3 per cent in the first quarter as a strong showing from the service sector helped Britain avoid a triple-dip recession.

Mr Cridland said the economy was “moving from flat to growth”.

But he added growth prospects are “fraught with uncertainty” as consumers remain under pressure and Europe’s recovery crawls on.

The CBI expects unemployment to rise slightly to 2.58 million this year before receding slightly to 2.51 million next year.