Overall bank lending to contract for the first time since 2009, new research finds.

Overall bank lending contracts for the first time since 2009, new research shows. SMEs, commercial real estate and personal customers who fall outside of standard credit terms will be hit particularly hard. The growth of payday loan companies and alternative corporate funding vehicles is also set to continue at pace, as the paralysis of bank lending opens up the market further to alternative or ‘shadow’ banking at both ends of the market.

The Ernst & Young ITEM Club Outlook has also modeled what proportion of the revenues of the FTT would come from the UK. Even if the UK opts out, if a reverse charge mechanism was applied, the UK financial sector would contribute around 60% of total revenues.

Bank lending to contract by 2.2%

After expanding by an estimated 4.3% in 2011, the ITEM Club expects total bank loans to contract by 2.2% in 2012, with just 0.9% growth forecast in 2013.

The contraction in corporate loans is expected to be particularly sharp, with a 5.7% fall forecast for 2012. Financing conditions are likely to be particularly tight in the construction and real estate sectors and smaller companies will be particularly badly affected.

Neil Blake, senior economic adviser to the Ernst & Young ITEM Club commented: "Funding for small and medium-sized enterprises is likely to be particularly difficult to obtain as banks seek to reduce credit risk. The average interest rate on smaller loans, of £1m or less, is already double that charged on loans of £20m or more, and we expect this trend to continue. As these young companies tend to be high-growth businesses, this will have adverse knock-on effects for economic growth."

Consumer credit won’t recover until 2014

With banks expected to further tighten lending conditions, consumer credit will continue to shrink rapidly, contracting by a further 5.4% in 2012, and won’t hit 2011 levels again until 2014.

However, whilst banks and building societies’ unsecured lending to individuals has contracted by 23% (£34bn) since 2007, net lending by alternative high-cost consumer credit providers has risen by 42% (£29bn) over the same period.

Write-offs will increase across the board

Write-offs are forecast to increase across consumer credit and corporate loans. Consumer facing industries will be hit by the low growth forecasts for household income and consumer spending and bankruptcies in retail, hospitality and leisure, and defaults on unsecured lending are all set to increase.  

However, with rates forecast to remain at their current low level until mid 2013, the forecast increase in write-offs of residential loans is modest, especially as loan repayment forbearance by banks will likely continue to dampen default rates.

Insurance industry to show first significant signs of strain

Although the insurers have so far remained relatively healthy in comparison to other financial services sectors, this resilience will be tested in coming months.

The ongoing Eurozone crisis will continue to increase the potential for credit-rating downgrades for UK insurers and there is a danger that insurers’ generally large debt and equity holdings in banks could require them to raise more capital in the long run.