UK credit squeeze magnified by foreign retrenchment

British-owned banks are being unfairly blamed for a contraction of sterling banking activity by foreign-owned institutions operating in the UK.

Total sterling assets of UK-based banks grew by 8% in the year to December, down from 14% in the prior 12 months, according to Bank of England data. The 8% rise, however, conceals a 15% increase for domestically-owned banks offset by a 3% contraction in sterling assets of foreign institutions, which account for 34% of the amount outstanding.

Foreign banks continued to expand their lending to the non-bank private sector last year, though at a slower pace than British-owned banks. The decline in their total sterling assets reflected a cut-back in lending to other UK banks – this in turn constrained the ability of British banks to extend new credit to households and firms.

Of the 34% foreign share of total sterling assets, “other EU” banks account for 22 percentage points, “other developed countries” 7 pp and the US 4 pp. Last year’s contraction was due to a large fall in assets of banks from “other developed countries”, a category including Swiss, Canadian and Australian institutions, among others. Sterling assets of “other EU” banks grew by 7% during 2008, partly reflecting Santander’s acquisition – via Abbey – of Bradford & Bingley’s savings business. Icelandic banks are also included under “other EU” – their liquidation could affect future data.