Britain’s Banks May Be Hoarding Cash to Cover Bad Loans Due to Confusion Over Labour Market Data
Banks’ Provisions Surge
Britain’s banks may be setting aside extra cash to cover bad loans due to confusion surrounding the country’s faulty labour market data. According to a report, HSBC, Barclays, Lloyds, and NatWest had set aside £21.8 billion to cover debts that could sour. This is a significant increase from previous years, and experts believe it may be a result of the uncertainty surrounding the UK’s Office for National Statistics (ONS) data.
Methodology Updates Cause Concern
Lenders use a combination of metrics, including unemployment rate, GDP, property prices, inflation, and interest rates, to project default rates. However, the ONS has been struggling to collect accurate and sufficient data on employment trends, leading to criticism from central bankers and politicians. This has caused lenders to become more cautious and set aside more provisions as a result.
Banking Giants’ Provisions
HSBC, Lloyds, and NatWest have all highlighted the uncertainty surrounding the unemployment rate as a key source of credit-loss uncertainty. HSBC’s interim report noted that "estimation and forecast uncertainty for UK unemployment given ongoing methodology updates at the UK Office for National Statistics" posed a risk to their projections. Lloyds also singled out the unemployment rate as a key source of credit-loss uncertainty in its latest annual report. NatWest allocated £123 million to its retail banking loss provisions in the latest quarterly release, largely to account for economic uncertainties.
Expert Analysis
Gary Greenwood, an equity research analyst at Shore Capital, believes that the issues with the calculations used to underpin banks’ provisions "could make them more risk averse than they need to be and so constrain their appetite to lend, thus holding back economic growth." John O’Hanlon, emeritus professor of accounting at Lancaster University, agrees, stating that questionable data would lead to "increased caution on the part of banks in the measurement of their credit-loss allowances, which might cause those allowances to be higher than they would otherwise be."
Consequences for the Economy
The impact on the economy is likely to be limited, but the lack of reliable unemployment data remains a major blind spot for the UK’s financial sector. Bank of England officials are struggling to assess the tightness of the jobs market as they face key decisions on how quickly to reduce interest rates without stoking inflation.
Banks’ Response
Barclays, NatWest, HSBC, and Lloyds declined to comment on the matter.
Conclusion
In conclusion, the uncertainty surrounding the UK’s labour market data has led to a surge in provisions set aside by Britain’s banks. This increased caution may limit their appetite to lend, potentially holding back economic growth. As the Bank of England grapples with the challenge of assessing the tightness of the jobs market, it is clear that the lack of reliable unemployment data poses significant challenges for the financial sector.
FAQs
Q: What is the reason for the surge in provisions set aside by Britain’s banks?
A: The surge in provisions is likely due to the uncertainty surrounding the UK’s labour market data, which has led to a lack of reliable unemployment statistics.
Q: What is the impact of this on the economy?
A: The impact is likely to be limited, but the lack of reliable unemployment data remains a major blind spot for the UK’s financial sector.
Q: What is the Bank of England’s response to the challenge of assessing the tightness of the jobs market?
A: The Bank of England is struggling to assess the tightness of the jobs market as it faces key decisions on how quickly to reduce interest rates without stoking inflation.
