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Get this. Bank of England governor Mervyn King told the treasury select committee of MPs this morning that banks need less rather than more capital during economic downturns.
A confusing remark, perhaps, given that the regulators have just demanded all the high street banks bolster their capital cushions in the wake of the credit crunch. The taxpayer is putting £37bn into Royal Bank of Scotland, HBOS and Lloyds TSB while Barclays is raising £7bn, largely from Middle Eastern investors.
King is now making the point that the banks also need to feel able to extend new loans to businesses and would-be home owners and that if all they are doing is worrying about having enough capital to absorb losses caused by customers failing to make repayments on time they won't lend.
He is making his remarks at a time when the government is urging banks - particularly the ones in which it has big stakes - to lend in the recession. Without such lending, the governor is admitting the economy will go into a "steep recession".
The combination of higher capital cushions and paralysis in the wholesale money markets on which banks had relied to raise fresh funds is making it tougher to lend. The report by Sir James Crosby into mortgage funding released with yesterday's pre-budget report makes some grim forecasts to illustrate this point.
The former chief executive of deeply troubled HBOS predicts that the mortgage market will come to a complete standstill next year without government help. As it is, data from the British Bankers Association today already shows that lending is down 50% in the past 12 months.
Crosby is recommending that the government provide guarantees worth £100bn over two years to help banks start repackaging home loans into financial instruments known as mortgage-backed securities. In 2007, just before the credit crunch killed this market, the banks raised £200bn to fund lending this way. This year it has been close to impossible to find anyone willing to buy such bonds.
At the same time, the banks have been trying to lure savers to help balance their books. But saving could soon become less fashionable as the recession bites and forces people to dip into their nest eggs rather than add to them. This is no help to banks trying to maintain a commitment to bolster their capital reserves at a time when they cannot do what the government is doing - borrow to make ends meet.
The government can shout as loud as it wants about the banks lending money but if there is no money for banks to lend, it is simply a waste of time.
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