Bank lending in the United Kingdom is set to shrink this year for the first time since 2009 due to the impact of the ongoing funding crisis in the banking industry, the Ernst & Young ITEM Club said on Monday.
The ITEM Club Outlook for financial services predicts that the small and medium enterprises, commercial real estate and personal customers, who fall outside of standard credit terms, will be hit particularly hard by the decline in lending.
After expanding by an estimated 4.3 percent in 2011, total bank loans are expected to contract 2.2 percent in 2012, with just 0.9 percent growth forecast in 2013.
"We have been warning about the impact bank deleveraging could have on the economy for some time, but this is the first time there will be an annual contraction in total loans since 2009, when the UK economy was still suffering from the immediate effects of the global financial crisis." Neil Blake, senior economic adviser to the Ernst & Young ITEM Club said.
The contraction in corporate loans is expected to be particularly sharp, with a 5.7 percent fall in 2012. Consumer credit is forecast to contract by a further 5.4 percent in 2012, and is not expected to hit 2011 levels again until 2014.
Neil said that according to the ITEM Club estimates, if the Financial Transaction Tax (FTT) is introduced across the European Union, the UK financial sector would generate around 75 percent of the total revenues.
Even if the UK were to opt out of the FTT, if a reverse charge mechanism was applied, the UK financial sector would still contribute around 60 percent of total revenues, which would flow directly to governments in the Eurozone rather than to the UK Exchequer, according to Neil.
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