Traditional bank lending contracts, says Ernst & Young

Traditional bank lending has undergone a contraction for the first time in three years, leaving a void that providers of short term loans online are only too happy to fill, according to Ernst & Young.

According to the professional services orginsation’s latest ITEM Club report, personal, commercial real estate, and SME customers will bear the brunt of the market contraction, and may have to rely on alternative corporate funding vehicles such as no credit check short term loans as a result.  Meanwhile, with bank lending growing more paralysed, this opens the market up even wider for so-called ‘shadow’ banking, alternative lending facilities at both the high and low ends of the market.

In addition to the rise of payday advance lenders, the ITEM Club also predicted that the Financial Transactions Tax would impact the UK financial sector to the point where it would be contributing approximately 60 per cent of total revenues, even if the UK were to opt out of FTT.  The total contraction of bank lending is expected to be 2.2 per cent this year, with only 0.9 per cent growth predicted for next year.

Ernst & Young ITEM Club’s senior economic adviser, Neil Blake, said that bank deleveraging could impact the economy in a serious manner, and has been issuing warnings of the possibility for some time.  However, Mr Blake said that this will be the first instance of an annual total loan contraction since the immediate wake of the global financial crisis in 2009.

Corporate loan rates are expected to contract by a significant amount, with 2012 levels to drop by 5.7 per cent.  The real estate and construction sectors may be likely to face particularly tight financing conditions.

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