Exclusive: Banks And FSA Clash On Lending

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Britain's biggest banks have clashed with the City regulator over liquidity rules that they say will restrict their ability to participate in the Government's flagship new scheme to stimulate lending activity.

The bosses of the major high street lenders were summoned to a meeting on Tuesday with Lord Turner, chairman of the Financial Services Authority (FSA), and two other senior officials, Andrew Bailey and Paul Sharma.

I have learned that some of the bank executives who attended criticised suggestions made by the FSA that they were hoarding excessive amounts of cash and failing to lend sufficiently into the real economy.

According to a person briefed on the discussion, the FSA said that liquidity rules meant the banks only required £370bn of cash reserves but were in fact holding £500bn of reserves.

Lord Turner is understood to have sought the views of the bank executives about how liquidity rules might be relaxed to promote participation in the 'funding for lending' scheme unveiled earlier this month.

That initiative is designed to generate tens of billions of pounds in additional lending by using the Government's balance sheet to reduce the cost of borrowing.

"Lord Turner was clear that he wanted funding for lending to be a success," my source said. "That's unsurprising given his broader agenda."

The person said that the bankers interpreted Lord Turner's remarks as part of an emerging campaign by the FSA chairman to succeed Sir Mervyn King as Governor of the Bank of England.

But some of the bankers who attended the meeting are understood to have expressed incredulity at the FSA's stance, arguing that its 'super-equivalent' approach to European rules on capital and liquidity has prevented them from expanding their lending activity.

An executive at one bank said the FSA was told to reform the capital treatment of loans to businesses, which are more onerous than the rules applied to mortgage lending.

And the banks also pointed out that the ongoing remediation of payment protection insurance mis-selling was inhibiting their ability to lend to businesses.

The bankers who attended the summit included Stephen Hester, chief executive of Royal Bank of Scotland (LSE: RBS.L - news) ; Iain MacKay, finance director of HSBC; Graham Beale, chief executive of Nationwide; Antonio Horta-Osorio, chief executive of Lloyds Banking Group (LSE: LLOY.L - news) ; Chris Lucas, finance director of Barclays; and Stephen Jones, chief financial officer of Santander UK.

None of the banks or the FSA would comment on the meeting.