This is about as dumb as saying: "It is tough to get a hire car these days. Five years after the crisis, most car hire places prefer to keep their cars on the forecourt to rebuild capital instead of hiring them out."
People who say things like this are confusing two completely different sides of bank balance sheets and/or totally unclear as to what they mean by "capital" (even if we use the term in the narrow context of banking*). Let's refer back to a diagram I posted in 2011:
If our goldsmith has some liquid assets on the left hand side of his balance sheet (gold coins in the safe) then clearly:
a) whether he lends them out or not makes absolutely no difference to the right hand side of his balance sheet in the short term. The depositors are indifferent whether the banks has assets of 90 gold coins' worth of loans + 10 physical gold coins or 100 gold coins, or any combination which adds up to 100 gold coins.
b) if the goldsmith does not lend them out, he is not earning interest, most of which gets passed on to the depositors on the right hand side of his balance sheet.
And the same applies to a bank, if instead of £100 million in loans, it has £95 million in loans (earning interest) and £5 million in cash or near-cash (not earning interest) on the left hand side of its balance sheet then clearly:
a) whether or not it lends out that cash or near-cash makes absolutely no difference to the right hand side of its balance sheet in the short term. The depositors and shareholders are indifferent. It does not change the value of "share capital and reserves".
b) if the bank does not lend out its non-interest earning cash or near-cash and still has to pay interest to depositors, it is not earning any extra profit which would go into "share capital and reserves" on the right hand side of its balance sheet. So in the long run, it is eroding its "share capital and reserves".
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The only explanation for this is that banks are more worried about the ratio of deposits-to-share capital on the right hand side than they are worried about the ratio of liquid assets (cash and near cash) to illiquid assets (loans at interest) on the left-hand side.
For example, if the new "Basel" rules say that banks have to have 11% capital and reserves on the right-hand side instead of only 10%** and banks have £10 million spare cash or near-cash, then they can improve their 'Basel capital adequacy" ratio from 10% to 11% by repaying £10 million of deposits, so they end up with £80 million of deposits and "Shareholder capital and reserves" of £10 million (i.e. unchanged) so their Basel ratio is now 10/90 = 11%. They could of course achieve the 11% ratio overnight by simply persuading £1 million's worth of depositors to subscribe for shares (a debt-for-equity swap), but let's put that to one side.
But of course the politicians do not grasp this (neither do they or most people grasp that the term "in reserve" and "reserves" are two completely different things - look again at those two balance sheets) and want banks to hold more liquid assets on the left-hand side as well.
Which puts the banks nicely in a bind. If their borrowers dutifully repay loans (in cash) so that a bank ends up with £10 million in the safe, should it hang on to that to keep the politicians who are crying out for banks to have more liquid assets happy; or should they take it out of the safe and repay depositors to keep the politicians who are crying out for banks to reduce their gearing ratios*** happy?
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* "Capital" means different things in different contexts. In the wider sense, the only things which are capital are machines, buildings, know-how, the skills you use in your job etc. Money is not "capital" at all, it is a way of measuring/recording indebtedness on one side and ownership on the other. Money is an abstract concept; when they talk about "capital disappearing into tax havens" what they mean is that the records of who owns what are now being kept abroad; they do not mean that tax avoiders are taking all their machines, buildings, know-how and skilled workers and moving them physically to tax havens.
** Yes, I am perfectly aware that banks are allowed to operate on the basis of 3% or 4% reserves. 10% is just a nice round figure for doing these examples.
*** The gearing ratio is merely the inverse of the "share capital and reserves-to-total assets" ratio. In the diagram, the bank's share capital and reserves are £10 million out of £100 million = 10%. So the gearing ratio is 10. If the banks collects £10 million of loans and repays £10 million of depositors, it has a "share capital and reserves-to-total assets" ratio of 11% and a gearing ratio of 9.
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