Vince Cable Attacks Bank Capital Ruling

Vince Cable, the Business Secretary, has attacked plans to force Britain's banks to raise up to £25bn to strengthen their balance sheets, warning that it would slow the pace of economic recovery.

Speaking exclusively to Sky News, Mr Cable said the ruling by the new Financial Policy Committee (FPC) of the Bank of England was counterproductive.

The FPC said this morning that unrecognised future losses on bad loans and future provisions for product mis-selling meant there was a vast black hole in capital buffers across the banking sector.

But Mr Cable criticised the new committee, and said his view was echoed by Mark Carney, the Canadian who takes over as Governor of the Bank of England in June.

"The idea that banks should be forced to raise new capital during a period of recession is an erroneous one. This FPC exercise will prolong the time it takes for the British economy to recover by further depressing already-weak SME lending," Mr Cable told me.

"I believe the weight of the argument is in favour of counter-, not pro-cyclical, lending measures, and I rather suspect that the new Governor of the Bank of England shares this view."

Mr Cable's remarks - the most strident he has made to date on the issue - threaten to ignite a new Coalition row over banking reform just days before responsibility for regulating the industry formally returns to the Bank of England.

The Business Secretary pointed out that he had "a direct stake" in the debate over bank capital, as weak lending figures highlight the difficulty of increasing lending to small and medium-sized businesses (SMEs).

His comments also betray Mr Cable's frustration that the FPC's verdict will further entrench a mindset among senior bankers that they should accelerate the deleveraging of their institutions' balance sheets.

A succession of Treasury schemes, including the National Loan Guarantee Scheme and Funding for Lending have failed to kickstart SME lending, intensifying the pressure on George Osborne, the Chancellor.

The FPC's findings will now be digested by the major banks during boardroom discussions over the next 24 hours. Lenders ranging from Barclays and Nationwide will have to agree funding plans with the new Prudential Regulation Authority but are unlikely to make full statements to investors until these plans have been agreed.

The FPC has a remit to monitor risks in the financial system. Today's verdict on bank capital shortfalls is expected to be viewed in the City as an attempt to adopt a cautious approach amid ongoing problems in the Eurozone and escalating penalties for mis-selling payment protection insurance and other products.