On Monday the UK Financial Services Authority is to be wound down and its powers handed over to successor bodies. It has made sure not to leave the stage quietly. This week, the Bank of England’s Financial Policy Committee, which is taking on responsibility for overall financial stability, announced that FSA analysis implied UK banks needed to find ￡25bn of additional capital by the end of 2013. Regulators also plan to let new banks start up with less capital than established ones.

The finding of a capital shortfall had been well-flagged and was smaller than many had expected. Still, it is an important announcement. That initially healthy numbers conceal a scarcity of loss-absorbing capital goes a long way to explaining banks’ unwillingness to lend and thus the disappointing potency of monetary activism, government’s preferred tool for propping up demand in the economy.

Although the Bank of England’s interest rate is at a record low, the spread above it of borrowing costs for households and businesses has remained high by pre-crisis standards. Banks in rude health would rush to exploit such a profit margin by expanding lending. In fact, lending is shrinking – in spite of a flagship “funding for lending” programme. Banks say they are making credit more available to small businesses but the cost of that credit has not fallen. Also, many companies unable to service more than interest costs on outstanding loans are being kept alive by bank forbearance. All this points to a banking system too worried about future losses on its legacy exposures to expand lending to new borrowers – even good ones.