Tucker queries banks' 'odd' priorities

The Bank of England's executive director of markets last night questioned banks' reluctance to raise fresh capital and their payment of dividends while cutting back on lending.

Paul Tucker said that banks' conservation of capital to support loans stuck on their balance sheets was stopping them from lending on attractive terms now available. The situation is made worse by lenders' reluctance to raise capital "except where the market thinks that it is beyond doubt that they need to do so", he said.

Mervyn King, the Governor of the Bank of England, has twice called on British banks, which have lower core capital ratios than European and US rivals, to raise fresh capital if necessary. The Governor is concerned capital-constrained banks will starve the economy of credit, exacerbating the slowdown.

But banks including Royal Bank of Scotland and Barclays have said they do not need new capital. They have also raised their dividends and declared that the increased payouts were a sign of their confidence and underlying strength.

Mr Tucker said in a speech: "Given the feedback from credit conditions to asset prices and the real economy and so potentially to banks' future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources."

Mr Tucker suggested that banks could be holding back from raising new capital because they fear it will be seen as a sign of weakness. He said bankers may also believe that assets on their books are undervalued, and that markets for selling them to investors would recover. "On that view, banks are avoiding becoming over-capitalised on a [forward-looking] basis," Mr Tucker said. Yet he questioned why, if this was the case, longer-term investors had not stepped in to pick up bargains.

Mr Tucker's speech follows UBS's announcement on Tuesday of $19bn (£9.5bn) of additional write-downs from the credit crunch and a SFr15bn (£7.5bn) rights issue to shore up its capital position.

Mr Tucker, a member of the Bank's Monetary Policy Committee, said that tighter credit conditions had increased the downside risk to demand and inflation. Though "backward-looking" economic indicators had held up reasonably well, "we should not place great weight on that", he added. Many economists now expect the Bank to cut interest rates when the MPC meets this month.