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How meaningful will be banks' pledge to lend £190bn?

Robert Peston | 07:40 UK time, Monday, 7 February 2011

Is there a genuine middle position between allowing market forces to determine how much is lent to businesses - more-or-less the current position which is widely seen to be depriving small companies of vital finance - and nationalising the process of providing credit?

The government hopes and believes there is such a "third way", to use an arguably tarnished term beloved of a recent prime minister.

The search for this third way has been in progress for the 10 weeks or so of negotiations between the Treasury and the UK's four biggest banks, Barclays, RBS, HSBC and Lloyds.

Ministers want banks to commit to a "responsible" approach to bonuses (in the words of a banker - he was unable to tell me what "responsibility" as applied to bonuses might mean although it doesn't mean "small") and to increase the credit the banks make available to support economic recovery.

If the Tory and Lib Dem members of the government can reconcile their differences about what they want and expect from the banks, an announcement of what George Osborne calls a "settlement" with them - and which also goes by the nickname of Project Merlin - could come in the coming week.

What would it mean in practice for these banks to "promise" to lend £190bn odd to small and big companies in 2011 (which is broadly what I expect)?

Well there's a hard version of such a promise and soft version.

The hard version - which is that the banks would pledge to actually lend that sum - is not going to happen.

The reason is that the banks' independent shareholders would not tolerate the banks lending to businesses that could not afford to repay the money.

Even taxpayers - who own a huge slug of RBS and Lloyds shares - might feel queasy at the thought that the banks were lending merely in order to hit quantitative targets, rather than to generate profits.

To lend only because they've been told by ministers to do so, and irrespective of the risks, would be to throw money away - something the banks did all too brilliantly in the run up to the Great Crash of 2008, even when they weren't being urged by ministers to lend more.

So if the chancellor wanted the £190bn injected into businesses, regardless of any judgement of credit-worthiness, he would have to nationalise all of RBS, Lloyds, Barclays and HSBC - which is not going to happen.

The banks are therefore making a soft promise: they will lend the £190bn only if it makes commercial sense to do so, if there is demand for the money from businesses able to make a convincing case to the banks that they can pay the money back.

Banks will make the £190bn available, but actual lending will be subject to "commercial terms": banks will retain discretion to judge whether applicants for loans are a good or bad bet.

Now, it's not immediately clear how that is different, in a fundamental sense, from what the banks are doing right now.

Maybe this is a test of the behavioural economics favoured by the Tory part of the coalition, of the idea that somehow banks' behaviour will be different if they are told to stand at the front of the class, admit their sins and promise to do differently in the future.

However some critics of the banks will fear that actual lending to businesses, especially to smaller businesses, will continue to shrink, as it has done for the past couple of years - because banks have swung too far from recklessness in their lending decisions to cautiousness.

That fear will be reinforced by the fact that the £190bn of commitments will be a gross figure, not a figure for how much banks' balance sheets should actually expand.

Or to put it another way, if banks were to force repayment of loans from some businesses for whatever reason (good or bad), that contraction of the amount of credit provided to the economy would be ignored in assessing whether they had honoured their lending promises.

That said, ministers know that they can't coerce banks to lend. So they are engaging in a second bit of behavioural economics: they are trying to nudge them to lend more, by getting them to strengthen the link between future bonuses and the provision of credit.

But, again, this will be a soft link between pay and lending, whose impact may be limited - because a hard mechanistic link would be viewed by shareholders and old-school bankers as insane.

As it happens, Stephen Hester, chief executive of RBS, has always had in his contract that the bank has to demonstrate lending availability - which is a million miles from rewarding him for actually lending money. And Antonio Horta-Osorio has a similar provision in his contract as new chief executive of Lloyds.

What ministers hope is that if RBS or Lloyds, for example, were to renew and perhaps strengthen the promise to make a specified volume of credit available and then failed to provide loans of that magnitude, the relevant chief executive would have to explain why the loans had not gone out of the door to the bank's remuneration committee in order to avoid a pay sanction.

But just how likely is it that non-executives on the remuneration committee would contradict a chief executive's claim that credit-worthy borrowers could not be found? If the chief executive said that more lending would have generated more losses for the bank, would the non-executives really wish to punish that chief executive for displaying the great bankers' virtue of prudence?

Look at all this another way.

Paying Hester, Horta-Osoria and their other peers bigger bonuses for actually pumping out credit, as opposed to just making it available, would be a bit rum. Such a pay policy would look a lot like the madness of the bubble years - when too many bankers became multi-millionaires for lending without due regard to the risks, and the rest of us were handed the bill.

Update 09:55: A government source insists that the status quo on bank lending will be changed in a fundamental respect. If banks henceforth cite "lack of demand" for a failure to provide the £190bn of loans, that "excuse" would be rejected by the chancellor and business secretary.

Which certainly increases the pressure on banks to lend to business. But it doesn't deal with the problem that banks' assessment of the credit-worthiness of borrowers is subjective - and there will remain plenty of scope for banks to reject borrowing applications from businesses that the chancellor and business secretary may wish were supported.

Comments

Page 1 of 3

  • Comment number 1.

    Too much credit - crash. Not enough credit - depression. Are we even tugging the right levers any more?

  • Comment number 2.

    Lets me get this straight the 'solution' to a debt-fuelled crash is to force feed debt-junkies more debt! All this is about is making more profits for bankers.

  • Comment number 3.

    Do bankers not realise that we've all been read The Boy That Cried Wolf when we were small?

  • Comment number 4.

    Of course banks want to lend. Apart from charging fees and cross-selling investment products it's how they make their money. So I'm not really sure why banks need encouragement to lend. The retail banks can't make money if they don't. And it was Cinton giving forcible encouragement to US banks to lend to sub-prime borrowers that eventually dragged down many banks around the world. I can't believe anybody would consider doing the same again, would they?

    No, I think the government needs its own soft loan or start up capital provider. UK banks should provide the capital for the provider (in proportion to the size of their UK market share) and should be eligible for dividends like any other investor. High on the list of priorities should be any management buy out proposal from highly qualified, highly skilled people like the redundant employees at Pfizer in Sandwich, and potential world leading manufacturers like Forgemasters in Sheffield.

  • Comment number 5.

    The main part of this blog entry is essentially a non-story: the banks make a 'pledge' to provide £190bn in credit, but on 'business as usual' terms which do not directly change the status quo in lending policy.

    As to lending policy in general, I'm slightly confused - on one hand banks aren't lending enough, SMEs are suffering for it, and therefore banks are being pressured to lend more. On the other, banks are attempting to reign in unjudicious lending and risk taking (essentially what caused the self-styled 'Great Crash of 2008') and only lending to those that can actually afford to make the repayments. So who is actually right?

    Seems to me that the only discerning factor which can vindicate either course is whther the businesses can actually afford the credit or not. The banks obviously think they can't, which is why they wont lend. Does this mean the Government believes they can afford to borrow?

    It sounds to me like we could be heading very quickly back to old ways, and the fact that the Government is trying to push this trend is worrying.

  • Comment number 6.

    This Government has shown that they cannot make the banks do anything that the banks do not want to do.

    The government is powerless and ineffective and lacks the will to take the banks on.

    Not surprising as their families and friends are in the industry

  • Comment number 7.

    Robert, is there any chance of local 'banks' being set up? I seem to think that 100 years ago there were locally based sources of lending in major cities. They could understand the risk and provide funding. Perhaps there are not enough small banks now?

  • Comment number 8.

    I think that we need to remember that the first priorities of the MPs of this government are:

    1. Themselves as individuals
    2. Their friends
    3. The party

    And for the banks it is:

    1. Themselves as individuals
    2. Their friends
    3. The bank

    The welfare of country has always been a low priority unless it might affect the above.

  • Comment number 9.

    I don't think the Govt have quite pin pointed the problem. You might put your blog another way Robert - Banks balance sheets may suffer if the loans can't be paid back but at least small businesses will survive. I think the real problem is banks accountability is not transparent - in other words if they say the business is not viable to lend to, who's checking this is really the case - they can make these claims and say there are no takers and no-one is independently going to challenge them - least of all, as you say, the non-executives. Independent auditors, perhaps connected with a body like the CBI, could investigate these claims. In many cases it might not be throwing money away, but if it were I wouldn't countenance it - in other words the businesses ought to be viable - Some might disagree saying the businesses ought to be kept alive until the economic climate recovers, that's a discussion perhaps worth having.

  • Comment number 10.

    This beggars belief! It would be pure farce if its consequences weren't likely to be tragic.

    Banks are in business to lend money, and always have been. The operative words are "in business": to make unprofitable loans, or loans which - although profitable short-term - dangerously damage a bank's continued existence longer-term, is not good business and far from being encouraged ought to be discouraged. The British taxpayer as a substantial shareholder in some of these banks and ultimate guarantor (willy-nilly) of all of them, is in no way benefited by such folly.

    This is politicians at their very worst - trying to sell snake-oil to the electorate, as a pathetic substitute for real, hard-edged policy-making. Do they really believe this is going to fool anybody? What an insult to the public's intelligence!

    I suspect these ministers will come to rue the day they ever thought of going in for this kind of cheap trickery.

    The mess we are in is all-too-vividly demonstrated by this pitiful charade. The banks are in the driving-seat which, in a democracy, is supposed to be occupied by the elected government. They are in it because the banking-system which has been permitted to become established inevitably puts them there. The banks create 97% of all our money, in the form of debt; our government issues 3% of it in the form of debt-free cash.

    THAT'S the problem! That's what cries out to be changed. Until it is, nothing else will be.

  • Comment number 11.

    re #2 Good post.

    Right on, man! I'm with you there.

    That said, when I was a lad, before the war, the way banks made some money was by lending it to businesses and people.

    As the yoof of today would say, "Duh-herrhhh."

  • Comment number 12.

    To put it in terms of manufacturing, would it be:

    Piecework
    Be paid for quantity but it can affect quality. Easily manipulated by the producer by under producing to raise the price

    Measured daywork
    Targeted out put at a given quality. Easily manipulated by the producer by under producing to lower the target therefore productivity can suffer and hence efficiency

    Daywork
    Be paid for quality at the expense of quantity. Productivity can suffer and hence efficiency

    It makes no difference which you choose; it is all going to rest on the integrity of the producer.

    The banks have already lost my confidence and therefore for me it would make sense to put rules including sanctions in place

    It is the job of Whitehall to get the ‘carrot, rule and stick’ at the correct levels. This can only be done by negotiation but never forgetting that Whitehall is in charge not the banks who enter the negotiations disadvantaged because of the initiatives already provided for their so called survival, no matter what bravado they put forward.

  • Comment number 13.

    4. At 08:46am on 7th Feb 2011, Slessac
    5. At 08:48am on 7th Feb 2011, Turbulent_Times

    I do not think it is lending for lending sake, it is more profitable to invest in the markets than to lend to SME, therefore SME are starved of investment whether they meet any criteria or not.

    It therefore makes sense to split the banks into various divisions or close them and start afresh.

  • Comment number 14.

    The Gov isn't doing anything because it is a weak government. The Cons should have stayed in opposition and forced another election.

  • Comment number 15.

    "The reason is that the banks' independent shareholders would not tolerate the banks lending to businesses that could not afford to repay the money" and yet they tolerated outrageous bonuses and remuneration even when share prices in some cases were decimated.

    to .."lend the £190bn only if it makes commercial sense to do so," - as nearly everyone above has spotted this is just smoke and mirrors but it will get the coalition into even more trouble. Fiduciary duty and all that which of course does not included bonuses and remuneration. It is open to the government to insist the nationalised banks loosen up and agree to indemnify against excessive non recoverable bad debts. What has happened to risk management - a respectable and sometimes quantifiable discipline.

  • Comment number 16.

    Don't all jump for joy. This money will NOT be available for start up capital purposes! That's what the banks mean by,"they will lend the £190bn only if it makes commercial sense to do so." (Commercial sense does not equal any old pie-in-the-sky business plan.) So it will only be used for existing businesses that need working capital, unless those businesses are on the verge of bankruptcy because they have failed to pay the VAT bill. Failing to pay your VAT bill is a strong indication of your businesses finances being hopelessly out of control.

    We've had £200 billion of QE and now we're proposing £190bn of funny money business lending? I suspect there's a rat in there somewhere.

  • Comment number 17.

    Surely the issue is in defining what is credit worthy?

    My idea is that the third way involves the companies paying a marginally higher rate of interst. This would be used to monitor a higher level of monitoring. With a solid borrower all you are interested in is whether the repayments are made. With one of the fringe borrowers you have intermediate targets, closer monitoring and escalating intervention. The government would provide guidelines about how this would happen so that the banks could take action at a reasonable level, not a draconian level - but the aim is that the company with perhaps a little more cautious advice would be able to keep up their payments and prove the doubting bankers wrong.

  • Comment number 18.

    As a taxpayer, I'm not that bothered about excessive profit on the money we gave to bail out the banks, if we eventually get it back with marginal rate of interest above inflation.

    Sure, irresponsible quota-based lending is just daft, but there is a need to drive growth in our economy, and lending is vital to that.

    I think the banks pursuit of excessive profit, and not necessarily lending default risk, is getting in the way, both in terms of interest rates, and willingness to lend. interest rate spreads seem quite obnoxious in the current context.

    Why can't we use our ownership of two of the biggest banks to set out clear mandatory guidelines for lending (i.e. if a borrower ticks the right boxes they qualify), and fix low interest rates for these banks to lend at?

    The point being that the government, not the banks, sets the mandatory guidelines and rates for these two big banks, with the empahisis set on a reasonable return and credit risk, rather than excessive profit. We DO own them after all.

    The rest of them can then compete with that benchmark in the lending market.

    That will cut profits in the banks, but if done right, they will still be profitable.

    And THEN the bonuses might be more sober in measure.

  • Comment number 19.

    #14. Leuctrid wrote:

    "The Gov isn't doing anything because it is a weak government. The Cons should have stayed in opposition and forced another election."

    But the 'Con'- men were scared that they would have lost!

    In Government they are desperately rushing to destroy the consensus of what makes the Nation - Green Belt and National Forests to be rapidly sold off to their banker friends, close all libraries to prevent learning spreading to the poor and thee working class, restrict University education to the privileged rich and withdraw all workers rights and get out of Europe to impoverish the mass of British people, but further enrich the super-rich and bankers - and that is just today's 'News'!These are the thinks that makes them Tories! They only work for their own friends and class and will do all they can to do so at the cost of the rest of us!!!!

  • Comment number 20.

    As the average 'man in the street' it still stuns me that when most of the banks were holding out their hands for the billions that 'I' gave them that tougher conditions were not imposed by the then government and the current BoE. This is not hindsight talking, it was criticized at the time of the bail-outs and now that lack of thought is severely restricting the growth. Whilst you cannot lend to businesses that are risky you can can relax the lending criteria and that is not being done - because the banks do not have to. They are back to making billions again without the risk of lending to us - so why do it. The phase that springs to mind - bolted, gate, horse.

  • Comment number 21.

    #15. watriler wrote:

    "to .."lend the £190bn only if it makes commercial sense to do so,""

    It isn't smoke and mirrors, if only it was, the money will go to their foreign, banking and business friends to refinance the Tory party!

  • Comment number 22.

    Wow, this seems like a real triumph of the free market system.

    Interest rates are kept artificially low by the BoE and through QE in order to maintain asset and property values, otherwise mass insolvency in the financial, corporate and property worlds. And the rates are too low to warrant loans to SME businesses.


  • Comment number 23.

    "Is there a genuine middle position between allowing market forces to determine how much is lent to businesses - more-or-less the current position which is widely seen to be depriving small companies of vital finance - and nationalising the process of providing credit?"

    To nationalise the process of providing credit would, in effect, remove at a stroke the raison d'etre of banks. Undoubtedly some radicals would think that that would be a very good thing, but it's hard to see how it could take place without a whole slew of other equally radical shifts in the structure of the world's current economic system taking place as well. So really it's no more than a debating-point.

    But a middle ground does indeed exist between that extreme and its opposite which is what we have now, and moreover one which is perfectly workable in the real world. We know this because it has worked before. It consists, broadly, of a banking system which functions in a manner no different from any other business, and whose business model is to engage in financial intermediation and maturity transformation - employing solely its own capital (owned or borrowed) for that purpose. Any such bank's risk profile would be for the owners/shareholders to determine: bigger risks mean prospectively bigger profits but also commensurately greater exposure to the possibility of failure. This would result in a wide spread, from inherently cautious, "dull" banks (like the building-societties used to be) to hedge-funds, with all shades in between.

    The one key difference from today's would be that *of course* such banks would not be permitted to create money out of thin air.

    "Money storage" (ie the digital equivalent of what we used to call "ready cash") for the purposes of making and receiving payments, and parking the "float" in a safe and readily accessible place meanwhile, would operate entirely segregated from banking as defined above. Which doesn't mean banks need be prevented from engaging in it, and charging for it (that would be up to them). This was what the giro was invented for, as a public utility. But under no circumstances would they be allowed to purloin it for their own use and profit, because it would never become their property.

    Whether or not banks then would provide "enough" credit depends on a number of factors, starting with what is judged to be "enough" and who does the judging. Other factors include:- government fiscal policy (ie how much government extracts from or pumps into the non-government sector over a given period); the tax-treatment of borrowings as compared with equity capital; the flows of government borrowing/debt-repayment over time ; the central bank's monetary policy (interest-rates specifically). And others - take your pick. (And all of that is without considering external factors - terms of trade, balance of payments, etc)

    There is no intrinsic reason why, with the right balance of these various mechanisms in place at any given time to fit the prevailing and anticipated economic conditions, the supply of credit need fall short of that *genuinely* needed for productive investment. Consumer demand, I suggest, is better acted-upon through fiscal and monetary instruments than credit.

  • Comment number 24.


    May be the banks should lend to the Gov't and the Gov't lend in turn to small enterprises ?

    Gov'ts know better than banks about commercial risk assessment. At least the Treasury does.

    The BoE and FSA are pretty sharp too.

    PS Mr Peston , your tweet over the w/e on the evidence surrounding phone tapping in the Media and the Met and the CPS was interesting and disquieting.

  • Comment number 25.

    Is there a genuine middle position between allowing market forces to determine how much is lent to businesses - more-or-less the current position which is widely seen to be depriving small companies of vital finance - and nationalising the process of providing credit?
    ===============================

    No.

    Allowing govt to be control of who gets what loans is guaranteed to make a bad situation worse.

    Leave allocation to the market but look at regulation and accounting rules which distort lending decisions - in US the community reinvestment act has been a total disaster, accounting rules which actively encourage (force) banks to sell on their loans thereby losing the vital relationship between buyer and seller... after all why worry about repayment risk as long as you can sell the loan on.

    Ultimately the govt is a Janus. They are, at the same time, berating banks for not putting risk at the heart of their operations and berating banks for not lending enough to SMEs, traditionally one of the more risky catagories of borrower

  • Comment number 26.

    Problem is there are no market forces being allowed to work if they had the banks would have been allowed to fail - or at least RBS, HBOS, B&B, NR - could have been wound down in an orderly fashion once taken into public ownership allowing a couple of new banks be raised from the ashes with a mandate to serve the needs of retail customers and SME's exclusively.

    Instead we have massive state dependant banks, propped up by taxpayer money, near zero interest rates and QEasy money - what a mess.

    I spoke to a banker recently, lamenting the fact that they can't manage to lend what's being asked of them - they really, just don't have a clue.

  • Comment number 27.

    Well I'm impressed with the Government negotiators, 10 weeks of hard nosed bargaining and the Banks gained nothing extra
    (I was expecting a doubling of bonuses at the very least)


    Business as usual it is then. (there's a surprise)



  • Comment number 28.

    The only way to resolve the banks is now to split out the usual commercial banking activities from all other investment banking activities and allow them to fail when they make the wrong investments.

    All other tinkering, is just a waste of time.

    The government has no power over the banks and should not have any power, the investment banks should not have a lender of last resort in the Bank of England. That way we can revive the economy without going back into the boom and bust cycle where we are now feeding the next boom to get us out of this recession.

  • Comment number 29.

    4. At 08:46am on 7th Feb 2011, Slessac wrote:
    Of course banks want to lend. Apart from charging fees and cross-selling investment products it's how they make their money. So I'm not really sure why banks need encouragement to lend. The retail banks can't make money if they don't. And it was Cinton giving forcible encouragement to US banks to lend to sub-prime borrowers that eventually dragged down many banks around the world. I can't believe anybody would consider doing the same again, would they?
    ---------------------------------------------------------------------

    If it was all Clinto's fault then how come it took 12 years to materialise?

    The subprime boom took place while US interest rates were kept at 1% for 4 or 5 years after 11 September 2001. With rates so low mortgage costs were much lower than rent. It would make sense for anyone (subprime or not) to take out debt rather than pay off your landlord's mortgage.

    The banks aggressively sold this debt because their brokers earned commisions on volume not risk-based profitability. The banks believing in the magic of financial alchemy (Look up the Gaussian Coppola "discovered" in 2001) believed that they could hedge away all the risk which in turn encouraged their brokers to be extra aggressive in hooking in new untapped markets (i.e. subprime).

    As for the borrowers themselves, they were seduced by rediculously generous terms by the banks and mortgage brokers and lulled into a false believe that rates would stay low forever. Also believed by the banks. Their loan repayments were lower than their previous rents and they were just following the American dream of getting ahead and owning your own home, in full knowledge that the financial risks were bourne by the lender as they could simply post the keys through the letterbox.

    In effect they just followed their self interest. Something I thought capitalists fully encouraged. Or is self interest, home ownership and getting ahead only for the rich? When the inflation shock of May 2006 came and rates rocketed this blew the whole facade. The people followed their self interest and stopped paying their loans when the cost of borrowing rose above rents. The banks weren't hedged. The assets weren't worth the value they had lent against. The collateral, deposits and haircuts (if at all) did not cover the fall in property. That's why it's the banks and the fed that have FULL reponsibility.

  • Comment number 30.

    Surely, the major part of the sturm und drang is the *change* in lending criteria since 2008? Both commercial/corporate and retail lending was fast & loose up to that point then stopped being so. Well-run businesses that for years had taken certain banking facilities for granted found that the ground rules changed; people seeking first time mortgages soon found themselves looking for 25% of the purchase price of a house, because of a 75% mortgage lending limit. Consequently, the "new banking reality" put a drag on business activity and the housing market flat-lined.
    What's particularly interesting about this is the question of how competitive the underlying UK economy actually has been, and to what extent it has been pretty marginal for years and only survived because of cheap credit.
    The banks aren't going to lend again in pre-credit crunch style, while a government would have to be barking mad to nationalise lending. (Now if you have an argument with the bank, you call your bank - you don't go for a barney with your MP. Which government would subject themselves to that kind of dialogue?)
    My guess is that real incomes and house prices will continue to fall, entrepreneurialism in SMEs will fade because the credit that fuels it will remain out of reach, and the real, painful adjustment to the UK economy (lower wages in real terms, fewer public sector jobs, lower house prices, more people in negative equity, decreased consumption, higher unemployment) is only really starting.

  • Comment number 31.

    7. At 08:49am on 7th Feb 2011, skippo wrote:
    Robert, is there any chance of local 'banks' being set up? I seem to think that 100 years ago there were locally based sources of lending in major cities. They could understand the risk and provide funding. Perhaps there are not enough small banks now?
    -------------------------------------------------------------------

    Would be nice wouldn't it? But who has the capital to undertake such an enterprise? With most capital concentrated in so few hands in this country it is not in their interest to do so.

  • Comment number 32.

    So the banks are going to promise to lend £190bn "subject to commercial terms". We'll get a press release saying that the Government has leant on the banks - but the commercial terms will continue to limit lending through "risk assessment" and impose punitive interest rate on all but the most secure of borrowers (ie not SMEs).

    Nothing much to see here. But how did we get into a state in which viable businesses go to the wall because they are unable to borrow?

  • Comment number 33.

    To some extent I agree with No4, the government ‘could’ support investment in business if the banks were not willing to do so (such as new start ups), with direct cash rather than tax management or other incentives normally on offer. Politically this would be a hot potato too, as then tax payers are potentially funding the commercial world. But if the government want to ‘force’ the economy along there are few options.

    We all know that market forces drive the economy, be it forward or reverse. Bullying banks is not going to make this change, however the government and the media for that matter can help stimulate the economy with speeches of confidence and belief. With confidence comes investment, banks will then want to lend more in periods of growth.

    This is basic economics, but there is a desperation to find this ‘third way’, and I think all this is doing is creating more fear. The government need to back off now, and give banks some time to think about how they can assist the country

    I’m sure we have the leaders of our banks focusing time monitoring statistics for the next ministerial report, and thus losing focus on the local economy they serve. I’ve said before that these government attacks are not helping anyone. Politicians at times can be a hindrance.

  • Comment number 34.

    Leave allocation to the market but look at regulation and accounting rules which distort lending decisions - in US the community reinvestment act has been a total disaster, accounting rules which actively encourage (force) banks to sell on their loans thereby losing the vital relationship between buyer and seller... after all why worry about repayment risk as long as you can sell the loan on.
    ------------------------------------------------------------------

    Strewth! So banks lobby for accounting changes that allow them to package and sell on debt, so that they can lend the money again and again and again. And you see this as being forced to lend! Myopic at best.

    No bank has ever been forced to lend, as we are currently seeing.

  • Comment number 35.

    The banks aren't going to lend again in pre-credit crunch style, while a government would have to be barking mad to nationalise lending. (Now if you have an argument with the bank, you call your bank - you don't go for a barney with your MP. Which government would subject themselves to that kind of dialogue?)
    My guess is that real incomes and house prices will continue to fall, entrepreneurialism in SMEs will fade because the credit that fuels it will remain out of reach, and the real, painful adjustment to the UK economy (lower wages in real terms, fewer public sector jobs, lower house prices, more people in negative equity, decreased consumption, higher unemployment) is only really starting.
    -------------------------------------------------------------------

    Yes good ol' tory solution of "Poverty is Wealth" for the masses.

    And the only real alternative won't be looked up because an MP is afraid to pick up his phone? Hmmm.

  • Comment number 36.

    Banks are already lending to small business. Hundreds of billions are being loaned out to hedge funds and traders in the city. The huge ponzi scheme in the city requires billions on a daily bases hence the inability of banks to extend themselves to the non-financial sector. Slowing money flows to the city will be catastrophic even to Joesoap who has no debt. Household is only a third of the debt of the city but we all know who will be blamed when the ponzi fails

  • Comment number 37.

    I'l try to stay on topic. The Govt is trying to get the banks to lend to small businesses. I suggested an independent body investigate the banks claims as to small business viability decisions. However, I think the reason for the problem is fairly obvious - small businesses can't afford to borrow the money because the banks are recovering their balance sheets through higher charges. No movement willl happen on this and the small businesses that are viable, but only on earlier lower charges (which let's face it led to this expansion of borrowing dependence) will go to the wall if the Govt doesn't step in and use it's nationalised banks to provide cheaper lending.

    Basically lending targets are one thing, business viability for borrowing another but where the real issue lies is expensive loans, but they're part of the banks recovery and banks aren't in it for saving strugging businesses at their own expense are they? However the Govt might be, but should it?

  • Comment number 38.

    G

  • Comment number 39.

    This is the sign of a government panicking because it is about to be badly exposed. The government made a shallow promise that in exchange for cuts to the public sector that private sector growth would take up the slack. It isn't happening.

    If the banks could lend more money they would do so - its in their interests. They aren't doing so because they don't see any opportunities for growth. Even if they did they would probably mess it up in that their self-interest always comes first even if it is to the detriment of the UK economy.

    The government has to take it on themselves. They have said that the private sector will grow. Now they are saying that the private sector won't grow because the banks aren't playing ball.

    Any fairly well educated person in this country can see where the stragegic areas for investment lie and the need for a rebalanced economy. The Germans have managed it but they required a tough government to do it and an overwhelming sense of national interest on the part of everyone involved.

    This country doesn't work that way. There are too many self-interested parties who are incapable of seeing the bigger picture. Thats why the economy is failing.

    All the deregulationists out there have had it their way for years now. It isn't working is it? As a nation we are too busy exploiting each other to possibly pull togethor to make it work. "Theres no such thing as society" some nincompoop once said. Now we are seeing the consequences. The "Me first" attitude means that we are stuck in a rut and are being outmanouvred by several other economies.

    The question is : how do you rid the UK of this attitude in a way which enables the economy to function for the benefit of everyone as it should?

    We live on 'Treasure Island' as far as big business is concerned. Their greed for profit via rigged markets and price collusion has driven consumers into vast debt. There are precious few opportunities for smaller business to get going due to barriers to entry caused by market collusion. As a result, consumers are now trying to rid themselves of debt and the economy is at a standstill. Even if consumers did have a rise in disposable income it would all be fiddled away by exorbitant prices.

    Look at the market for spectacles. About £15's worth of glass and plastic selling for about £140 on average. And 1/3 of all adults wear them. What happened to perfect competition and profits being driven down to a decent level? If you shoot the golden goose you can hardly expect it to lay an egg. Henry Ford said that he paid decent wages so that his workers could afford to buy his cars. The same goes with pricing. The economic logic in the UK is based largely on playing the middle man. We're great at trading - not much good at making.

    How many times do we need to listen to some narrow-minded moron who somehow has managed to find his way to the top of strategically important companies by declaring "My primary duty is to my shareholders". Duty to shareholders means price-fixing and imperfect markets. This is where that attitude leads in the end. A flatline economy.

  • Comment number 40.

    Another thought, Govt could impose demands on banks to localise alot of their lending decisions so that closer business relationships with clients was part of the deal. Alot of the decisions are blanket ones made remotely from local communities where business needs vary from region to region. Targetting specific areas for more bankd relaxed lending rather than a one-size fits all lending criteria test might help.

  • Comment number 41.

    The only way the banks could lend a pre-determined amount of money to business would be if the taxpayer was in some way involved in covering any losses, and that would be wrong...once we got into an arrangement like that it would be impossible to get out of it again, it would be privatised profits and socialised losses writ large.
    The era of cheap unlimited credit went on for years and is now over. The trouble is that there are people out there well into their 30's who have spent their whole adult lives knowing nothing else, and consider it in some way to be their right.
    I'm afraid the recovery will be a long slow one, it is going to take a few years to re-balance the economy and that is just the way it is going to be.

  • Comment number 42.

    We all know that market forces drive the economy, be it forward or reverse. Bullying banks is not going to make this change, however the government and the media for that matter can help stimulate the economy with speeches of confidence and belief. With confidence comes investment, banks will then want to lend more in periods of growth.
    --------------------------------------------------------------------

    Market forces.

    What market forces or signals warrant the base rate to be kept at 0.5% and for the supply of £200 billion of QE push the ten year yield down towards 3%?

    Is it the inflation rate at 3.5% to 6% depending on measure? Is it weak sterling?

    And yet individuals struggle to borrow 2 year money secured against their homes with a haircut of 25% for 3 to 4%. And SMEs are struggling to borrow unsecured at 8% or above. In fact there seems to price at which the banks will lend to them.

    Something looks serverely wrong with the market mechanism to me. I wouldn't put much faith in it "driving" the economy or otherwise, and believe me it's my job.

  • Comment number 43.

    36. At 10:34am on 7th Feb 2011, Supersage64 wrote:
    Banks are already lending to small business. Hundreds of billions are being loaned out to hedge funds and traders in the city
    ------------------------------------------------------------------

    Now we're getting somewhere.

  • Comment number 44.

    39. At 10:38am on 7th Feb 2011, i wrote:
    -----------------------------------------------------------------
    Brilliant Post. Sums it up perfectly for me.

  • Comment number 45.

    @25. Justin150 wrote:

    "Ultimately the govt is a Janus. They are, at the same time, berating banks for not putting risk at the heart of their operations and berating banks for not lending enough to SMEs,..."

    Spot on.

    "...traditionally one of the more risky catagories of borrower."

    Yes, but also the source of nearly all innovation and the bedrock of a healthily-functioning capitalist system. And that's one reason why SMEs' needs for capital are better met by equity (ie venture capital) than by debt - or anyway with debt only as a top-up.

  • Comment number 46.

    The whole 'Merlin' saga needs to be taken with a pinch of salt at the moment - it's a process of briefing, counter-briefing, positioning and PR. Plenty at stake for politicians and bankers alike, & they are all at it:
    http://cityunslicker.blogspot.com/2011/02/barclays-bank-of-future.html

  • Comment number 47.

    How about:
    1. Issue a set of guidelines, in combination with the banks, about lending criteria that made for a 'good business'. e.g. positive cashflow, sales greater than 20% of the amount borrowed etc..
    2. Ask the banks to capture all this info for potential borrowers, and collate the statistics.
    3. Give the banks a target of lending to 90% of businesses that meet the criteria.

  • Comment number 48.

    36. At 10:34am on 7th Feb 2011, You wrote:
    .....Household is only a third of the debt of the city but we all know who will be blamed when the ponzi fails
    --------------///
    Should read:
    Household Debt = 1/3 of City Debt...

  • Comment number 49.

    41. At 10:41am on 7th Feb 2011, muggwhump wrote:
    The only way the banks could lend a pre-determined amount of money to business would be if the taxpayer was in some way involved in covering any losses, and that would be wrong...once we got into an arrangement like that it would be impossible to get out of it again, it would be privatised profits and socialised losses writ large.

    ------------------------------------------------------------------

    That was also my first impression. That the banks will only lend to SMEs if their is a government guarantee for losses. Scary. If this is the case then the only solution is full nationalisation of RBS and they become the lender to SMEs at rates which make commercial sense to both parties. The profits are then also socialised. In time the other private banks will see that they are losing market share of a low-risk profitable business and will return to compete, especially once they lose the opportunities of cross-selling and have been inevitably burned in the QE driven commodity and equity markets.

  • Comment number 50.

    Under project Merlin read Alchemy! As for the market it does exactly what it says on the TIN, exploitation. Interesting to listen to the IoD calls to scrap collective bargaining for some public sectors, history repeating again, old Mrs T will be having a horiible chuckle to herself, if the allegations about her senility is true she'll be thinking she back just where she was 20+ years ago! And the Belgrano just got torpedoed......inside the exclusion zone!

  • Comment number 51.

    45. At 10:51am on 7th Feb 2011, torpare wrote:
    Yes, but also the source of nearly all innovation and the bedrock of a healthily-functioning capitalist system. And that's one reason why SMEs' needs for capital are better met by equity (ie venture capital) than by debt - or anyway with debt only as a top-up.
    --------------------------------------------------------------------

    But who has access to capital?

    I can really see budding entrepreneurs and innovators being up for it if they have to give increasingly large equity stakes away to backers/capitalists. It will lead to the death of entrepreneurship and innovation.

    Another example of how the gross iniquitable distribution of capital is killing its own theoretical justification, the law of uninted consequences it's subject to, and the myopic believe of its cheerleaders.

  • Comment number 52.

    @33. Richard Richardson wrote:

    "The government need to back off now, and give banks some time to think about how they can assist the country"

    Country? What country? Since when have "senior bankers" ever given a monkey's for anything other than the bank's profits? That's what they're in business for.

    And how much thought does a trader give to anything other than the size of his/her bonus?

  • Comment number 53.

    What a load of rubbish - banks CAN'T lend, it's not that they don't want to.

    Despite what the Government preaches the banks know that most SME's are about to be smacked into oblivion when the BoE is forced to raise rates - cutting consumption and raising costs for business. Only those with alternative sources of funding (Shares, Bonds etc.) can side-step this awaiting catastrophe (and we all know which types of businesses they are - don't we?)

    This is more hot air than the Mongolfier brothers first flight - banks talk and talk about lending, but only a bank who planned on self destruction would be lending in the current climate. The Government are just too stupid to realise this (or they don't care)

    Lending is down - and it's staying down - GET USED TO IT. When one of the predictors of the credit crunch described a 'credit wilderness' post the crisis - he wasn't joking - this is it folks.
    The banks will only lend to the cream of the crop - the rest - well they're all dead wood floating in the sea already. Sorry to be the bearer of bad news, but someone has to tell the SME's of this world how screwed they all are - the Government will lie and lie hoping all this will blow over before they're found out.

    I'm sure the banks will reveal figures on lending to 'prove' they're lending - but only idiot economists and mad Government planks would suggest increasing lending when it's clearly demand which is subdued (consumer demand and credit demand)

    This is my favourite bit:
    "If banks henceforth cite "lack of demand" for a failure to provide the £190bn of loans, that "excuse" would be rejected by the chancellor and business secretary. "

    So are they going to MAKE US BORROW?
    The only people that want to borrow now are generally those who have little choice - i.e. borrow or fail. Hence the banks reluctance to lend to these borrowers - they want people like me to borrow - but I don't want to because I know what's coming around the corner......

    ....and if lending stats ar right - I am certainly not alone....

    Now com on capitalists - tell us how you're going to 'fix' this one? Are we hoping a new market of creditworthy people and SME's will 'open up' and fulfill the void?

    Ha ha ha ha - it would be funny, such ridiculous concepts....if it wasn't such a serius matter.
    The bufoons of Capitalism strike again with their contradictions twisted into a matted wet knot. It's not confidence, it's not bad economic winds - it's pure and simple unarguable logic - (sensible) people don't borrow money when they know an economic maelstrom is coming - only the reckless and desperate borrow in these times...

  • Comment number 54.

    Well said JfH at 19.

  • Comment number 55.

    36. At 10:34am on 7th Feb 2011, Supersage64 wrote:
    Banks are already lending to small business. Hundreds of billions are being loaned out to hedge funds and traders in the city. The huge ponzi scheme in the city requires billions on a daily bases hence the inability of banks to extend themselves to the non-financial sector. Slowing money flows to the city will be catastrophic even to Joesoap who has no debt. Household is only a third of the debt of the city but we all know who will be blamed when the ponzi fails
    ----------------------------------------------------------------------

    This is the real elephant in the room which "mainstreet" is not so aware of, but known to all in the city.

    The investment banks make their money first and foremost in their treasury and finance departments by creating credit and supplying to the market either through loans to corporations, proprietary trading, or prime brokerage (i.e. extending credit) to hedge funds and other prop trading companies (like my own). The sums are vast and credit, although tighter than the heady days before 2007, is still relatively easy to come by.
    All other "wealth creating" activities of investment banks, i.e. advisory, research, M&A, brokerage etc piggy back on the supply of credit. It's like a mini QE.

  • Comment number 56.

    @46. Nick Drew wrote:

    "The whole 'Merlin' saga needs to be taken with a pinch of salt at the moment."

    I wonder who came up with that name.

    A born satirist, whoever he or she was. Merlin was a magician: he cast spells and used magic. And he never existed, except in a fairy-tale.

    How much more apt could the name be?

  • Comment number 57.

    @51. Reticent_Trader:

    I agree with you, though I wish I didn't.

    And your #42 was thought-provoking indeed, especially coming from a trader. Our blind worship of "market forces" has been our undoing more than any other single factor.

  • Comment number 58.

    How meaningful will be banks' pledge to lend £190bn?

    It will/would be most meaningful in terms of a mini-credit boom with the majority of the money going to e.g. the existing over-privileged, vested interests and non dom import sucking price creepers.

    ... the 'HAVES' ... in the globalised sector of the UK economy

    and near 'zero' going into the real UK domestic economy and the 14 million British people in need of a stable job/income.

    The policy will look good on GDP figures and allow the idiot politicians to leap around and wave their hands in weird circles saying 'growth' but will do very little to rebalance the economy, flatten out the vested interests, remove unnecessary privileges from supermarket price creep cartels, banks, non dom retailers and import suckers and those rotten eggs who hold back our economy from equal opportunity of enterprise.

    Only one solution at the moment ... wil raise revenue for the govt and create the conditions that will create new jobs in the UK ... that is vision on energy, transport, agriculture, training (as opposed to 'education'), ensuring that multi-nationals that bring in immigrants are fully legally and financially responsible for them in terms of their behaviour and all costs, law, housing, education , health care...

    all this on the back of 'selective modern protectionism' ... create aggregate demand in the UK by selective tariffing of key problem area imports.

    The govt as a choice the March in the budget which can be a budget for the entire country ... or it can be a budget mainly for the 'haves' ... vested interests, banker spiv friends and relatives of politicians and the establishment.

    The govt needs to throw the GDP book out into the dustbin and maximise UK domestic output values to their maximum in key areas of the economy/ unemployment/UK regions/ UK sectors.

    The govt needs to go make a real difference in our northern towns and cities and rural areas and not try and grab false and miselading GDP data headlines - the pursuit of which has done our country so much economic damage in the past.

    Unfortunately, the govt's plan are unlikely to benefit all and the allocation of this money will simply mean higher bank bonuses and spiv profits.

    This isn't just a party political attack on the Coalition govt ... same old, same new old new old Labour cannot be trusted at all on the UK economy, as the mopping up of the '13 year mess' continues.

    We need money in our pockets, we need less imports, we need a stable currency, we need less immigrants, we need jobs ... we need a vision and we need a future for all and not just for the 'haves'.

  • Comment number 59.

    53. At 11:05am on 7th Feb 2011, writingsonthewall wrote:
    The only people that want to borrow now are generally those who have little choice - i.e. borrow or fail. Hence the banks reluctance to lend to these borrowers
    -----------------------------------------------------------------

    It's the old problem of lemons and assymetrical information. Akerlof and Stiglitz.

    If the banks offered say a punitive rate, say 20%, to SMEs then only those SMEs who know they are in trouble would accept it, and likely default, so the bank loses. According to the principles of risk based lending then the bank should lend at a higher rate, say 30%, to compensate them for added risk. In such a case only those SMEs even more likely to default would accept such terms and the bank would get burnt.

    In such conditions there is no price at which the bank can lend to cover its risk. The market mechanism is broken. Kaputt. Nada. The state must step in.

    As an aside, assymetrical information is also the reason why systems based on private medical insurance are doomed to fail.

  • Comment number 60.

    "A government source insists that the status quo on bank lending will be changed in a fundamental respect. If banks henceforth cite "lack of demand" for a failure to provide the £190bn of loans, that "excuse" would be rejected by the chancellor and business secretary.

    Which certainly increases the pressure on banks to lend to business. But it doesn't deal with the problem that banks' assessment of the credit-worthiness of borrowers is subjective - and there will remain plenty of scope for banks to reject borrowing applications from businesses that the chancellor and business secretary may wish were supported."

    So are we being softened up for some kind of 'taxpayer guarantee' to cover the losses on loans to SME's or not?
    After all when the banks site a 'lack of demand' what they mean is a lack of demand from businesses they consider as viable.
    If the chancellor's definition of viable is different from the banks then isn't he going to end up putting our money where his mouth is?
    If so then the reality of privatised profit/socialised losses will, in effect, be underwriting our entire recovery...nice for the banks, not so good for us though.

  • Comment number 61.

    My observations on the demand for credit, both personal and business, is:

    The hopelessly indebted will borrow till the cows come home, but can’t pay it back.
    The modestly indebted could borrow more, but are nervous of the economic future.
    And the prudent won’t borrow per-se because they see the indebted being bled dry with ruinous charges and loan covenants.

    In short, there will necessarily be limited demand for bank credit based on ruinous charges and loan covenants, and an uncertain economic future.

  • Comment number 62.

    What business needs small or large is certain tax incentives, development grants, capital equipment allowances for re-investing in new technology, incentives to employ apprentices & incentives to export.
    The banks will always do what they want much like the legal profession, business in order to develop new desirable products to export need to re-build the skills base & capital equipment base this is how were help the JCBs of tomorrow (remember the banks never helped Bamford either!).

  • Comment number 63.

    I think #13 (Common Man) is on the right track.

    Robert: We already know that Banks make the majority of their profit from the Investment Banking side. Tell us what proportion of their loans go to that side.
    Just telling banks to lend more could mean lending less to businesses for productive investment and more for speculation, acquisitions, etc.

  • Comment number 64.

    @55. Reticent_Trader wrote:

    "This is the real elephant in the room which "mainstreet" is not so aware of..."

    You're right there - at least if I'm typical of what you call "mainstream". I wasn't aware of it for one.

    But it does fit in with what most of us have long held to be the case:- that the financial sector, in which the nation is supposed to take pride, far from supporting the country's economy in ways which - as in the German economy and many others - will stand the test of time, is just a gigantic gambling operation. It's as if UK PLC had turned itself into Las Vegas.

    Is there any way back from this fool's paradise, I wonder.

  • Comment number 65.

    At 11:05am on 7th Feb 2011, writingsonthewall wrote:

    “Despite what the Government preaches the banks know that most SME's are about to be smacked into oblivion when the BoE is forced to raise rates - cutting consumption and raising costs for business. Only those with alternative sources of funding (Shares, Bonds etc.) can side-step this awaiting catastrophe (and we all know which types of businesses they are - don't we?)”

    Raising interest rates now by any degree would probably usher in another collapse in the housing market, bank balance sheets and cause economic havoc.

    It must be done though sooner rather than later. Is its left to the end of the year I can’t see the economy recovering for a decade. Better to have three bad years now then ten later.

  • Comment number 66.

    Only taking into account credit worthiness assumes all loans are equal. They aren't - some are genuinely for investment and have the potential to create employment and benefit a wide group of people, and others are just for speculation and benefit a just handful of individuals.

    A good exanple would be the difference between lending money to a property developer to build a new housing estate, and lending another developer to 'invest' in properties on the open market.

    The first one will lead to employment for a whole load of builders, architects, carpenters etc. The second will lead to the employment of a couple of agents. But the first one will look riskier as planning permission will have to be negotiated, the project may overun and the ability of the developer to sell at the optimum time will generally be comprimised by factors out of his control.

    So looking at risk alone will not always give the results you want - setting targets for lending as a whole could lead to no social benefit and another bubble.

    So i would say the middle ground would be setting targets for specific types of lending - the lending that the govt would like to happen and that could be crowded out by a purely commercial approach.

  • Comment number 67.

    I also agree with nautonier that unfortunate as it is we now need as China & India practice "selective modern protectionist measures" to re-build our manufacturing base. Companies such as Dyson should be ashamed to manufacture British designed products in Malaysia ob behalf of a British company, M&S should be looking to source more in Britain and we should put tariffs on Chinese electrical goods that could easily be manufactured here like PCs, mobile phones etc.

  • Comment number 68.

    Dempster Wrote: The hopelessly indebted will borrow till the cows come home, but can’t pay it back.
    The company I work for was a forward thinking very profitable company that was purchased by one man for 2.5 times its value. He has since handed the business to a banks who run it to mitigate huge losses but in both cases they have strangled the forward thinking company and whilst for now it still at the operating level makes decent returns it can never pay back such huge loans thereby enshrining the very reason the market collapsed, greed.

  • Comment number 69.

    Reticent trader wrote "Strewth! So banks lobby for accounting changes that allow them to package and sell on debt, so that they can lend the money again and again and again"

    Maybe I did not explain myself very well. The banks did not lobby for the accounting changes - in fact the reverse they pointed out when they were introduced that the rules were muddle headed and would produce perverse results although the banks were at that time more interested in volatility of profits than any underlying principle.

    The two main accounting changes which have caused problems are:
    1. Banks can no longer make general provisions against bad debts but can only provision as and when a particular debt is bad
    2. mark to market of all loans.

    The first change inflated bank profits in good times - previously typically banks would make a general provision of around 2% of loans knowing that when boom turned to bust that provision would first be used. Taking away the general provision therefore also removed an extra cushion which banks built into there balance sheet.

    The second change was, in my view, totally absurd from an accounting perspective. In effect it decided that all loans would be treated as tradable stock. If a bank was going to take a hit on its profits by keeping performing loans on its books (for example because the market had decided that these sort of loans to that industry sector were in general not good) then they might as well sell the loan on and re-use the money generated to make more loans. It was the logical way of dealing with the volatility that mark to market would otherwise produce.

    The more eagled eye of you will spot that points 1 and 2 are not even internally consistent. Thanks Accounting standards Board

  • Comment number 70.

    You mention that Ministers may be unable to coerce banks to lend, but don't forget that that they are also unable to coerce businesses to borrow! The real problem with SME's is that despite the stories in the press about individuals being unable to borrow money, the truth is that many businesses (and consumers come to that) are in the process of de-leveraging. The reasons for this are pretty simple in that it was borrowing too heavily that got them into trouble in the first place so the best solution is to reduce debt rather than take more on. This being the case, it is no surprise that the banks see arbitrary lending targets as meaningless when the powers that be don't even seem to be interested in 'net' lending. After all, what is the point of celebrating £190 billion of lending, but ignore the £100 billion that has been repaid to the banks during the same time period? Funny old game.

  • Comment number 71.

    66. At 11:40am on 7th Feb 2011, MisterGC wrote:
    A good exanple would be the difference between lending money to a property developer to build a new housing estate, and lending another developer to 'invest' in properties on the open market.
    ----------------------------------------------------------------

    A good point, and in my opinion reflects the wasting of the QE stimulus which was spent on buying long-end gilts from the banks.

    Can you imagine the difference this money would have made if it was invested directly in the capital projects that this country so desperately needs?

    We keep debating the 20 or 30 billion needed to build the high speed rail network that would at least rival those of France and Germany. Small money compared to QE.

    It could have solved the sustainability energy problem once and for all.

    Part of it could have provided much needed subsidy to the skills-based industries that we need to foster in this country.

    How many years of the higher education budget could it have provided for.

    But all wasted on providing poker chips to the banks.

  • Comment number 72.

    #53 and 59
    Quite right, when I started in finance, I was taught that you can not price for poor quality, ever.Full stop.

    The banks are on a merry go round and its going to stop. When it does, we will be in the mire.

  • Comment number 73.

    I wonder if the deal being worked out will come at the expense of capital reserve ratios.

    If the current percieved lack of availability (which seems may not be the case) of loans is due to need to conserve higher capital ratios.
    Then could the banks simply be holding out for a mechanism which will permit them to lend more and count it as reserve for regulatory purposes - thus two birds one stone.

  • Comment number 74.

    We seem to be forgetting that there is a business cycle. Periods of excess risk are followed by periods of excess caution so that the system becomes sustainably mean reverting. Many aspects of the economy eg. house prices, are still nowhere near their sustainable mean, let aone beneath it. Only when this happens can safe growth really begin again. I read in Saturday's FT that new institutions are raising money to fill the gap in mortgage finance so that people can borrow up to 95% of value again. That can only be disasterous. As a country we have to start facing facts. Any attempt to rectify growth before the country has properly deleveraged will result in ever more frequent bubbles and recessions. The banks are just beginning to show us that, for a brief moment, they have learnt their lesson. Like anyone who has been spanked, they hurt. A spoilt child being punished frequently tantrums but failing to carry through the punishment results in an ever more unpleasant beast. The alternative is a communist style 5 year plan and history tells us that that wasn't very successful either.

  • Comment number 75.

    I think I can guess what their answer will be, but do those advocating imposing tariff-barriers not realise that Britain as a member of the EU does not currently have the power to set its own tariffs independently?

    The EU has only one tariff border, and it surrounds all 27 countries which make up the union. And it was above all a "customs union" *as a minimum* which a majority of the British people voted to join.

  • Comment number 76.

    What I still cannot understand is how the banks have still got such a strong say in what happens next?

    Yes pre 2007/8 the banks had the upper hand and they played it with skill but! as soon as any initiatives where needed the balance of power should have/was moved. Look at it as a boxing match Johnny was beating Billy 2 rounds to nil and it was the final round and Billy pins Johnny on the ropes and Johnny’s legs begin to wobble: Johnny is now one punch away from loosing is crown. If Billy finishes him off then Billy wins the crown or if allows Johnny to recover, Johnny if forever in Billy’s debt, either way Billy is made for life. This as not happened with the banks and I for one cannot understand it?

    It is no good saying it’s about money/power because the banks were on the ropes and wobbling!

    Could it be the way the money was given to them? We cannot claw the money back it was an open ended loan, we would have to rewrite contract law to enable us to do this. We have (as I understand it) none-voting shares so we cannot vote to change things! QE is in essence free and the guarantees are free. No wonder this Government is unable to act. Billy did have Johnny on the ropes but Billy forgot to say 'you’re a** is mine!'

    We keep going around and around and it all keeps coming back to…..IT IS UP TO US!

  • Comment number 77.

    Incredible!

    Strangely, companies ( rather than individuals) only need to borrow money either during a period of re-adjustment ( i.e a recession) or when they need to expand. They don't want to borrow money cos it's good fun!

    So along comes a recession, and in a very small period of time, your sales drop. If you believe that you can overcome this, but need some breathing space, you need to borrow money. But it's a recession, and you should have forseen this, so the banks won't lend you money, it's all your fault.

    So perhaps a company comes to the belief that the way round this is to fleece their customers relentlessly in the good times, to build up a war chest for the bad times. But then the customers don't get good value, and the Gov. has a go at you for hoarding!

    Nobody wins here, the only solution is for banks to do what they are supposed to do and lend money for short term problems. This only goes against the wishes of their owners if they have horribly short term views. If you force a business into bankcruptcy now, it won't be there for you to profit off after things settle.

    Perhaps the real reason banks can't lend respsonsibly is simply because they don't employ anybody responsible enough to assess the needs of the small business community - they've all got rid of them, to increase the banks profits...

    Madness: short term private banks dectating the economic policy of an entire country

  • Comment number 78.

    Can you imagine a new version of "Dragon's Den" where the Dragons are forced each episode to invest a certain amount.... without any control over who was coming through the door. Just a ridiculous idea.

    Where on earth has this £190billion number been plucked up from?

    The government should be working hard at making the UK an environment where banks are confident that new and expanding businesses will thrive, so willingly see the risk/return as worthwhile.

    If they want banks to be conduits to just pump money into the economy in some last ditch attempt to stimulate activity, then they should nationalise them.

  • Comment number 79.

    @35 Reticent_Trader .... I didn't mean to imply that the coming economic circumstances are a *good thing* ... frankly I'm feeling the chill winds myself ... but I do think this is what's going to happen.

  • Comment number 80.

    #2 John_from_Hendon wrote:

    'Lets me get this straight the 'solution' to a debt-fuelled crash is to force feed debt-junkies more debt! All this is about is making more profits for bankers.'

    #53 writingsonthewall wrote:

    'So are they going to MAKE US BORROW?'


    That is the only way to keep the banks afloat.

    First it is the increase in student fees (the loans cannot be defaulted on) and when student numbers start to fall then other ways of forced lending will be used such as only being able to pay your council tax in installments, the tax itself will be paid up front by the banks and repayments+interest will be paid back to the banks.
    (AAA rated loans, backed up by the taxpayers, the books will look great until the taxpayer finally defaults)

    The banks are holed beneath the waterline, as SMEs start to fail the large corporates will start to suffer.

    As that departing minister wrote, 'there is no money left', this is because the banking system has swallowed it all up.

    Eventually the banks will eat themselves.



  • Comment number 81.

    69. At 11:55am on 7th Feb 2011, Justin150 wrote:
    The second change was, in my view, totally absurd from an accounting perspective. In effect it decided that all loans would be treated as tradable stock. If a bank was going to take a hit on its profits by keeping performing loans on its books (for example because the market had decided that these sort of loans to that industry sector were in general not good) then they might as well sell the loan on and re-use the money generated to make more loans. It was the logical way of dealing with the volatility that mark to market would otherwise produce.
    ------------------------------------------------------------------

    Marking to market is the very mechanism that allows the bank to take all profit today rather than incrementally on say a ten year loan. If marked-to-market then the next step, the sale of that debt, is nice and easy. Freeing up for the proceeds to be relent. By use of interest rate swaps and credit derivatives (if applicable) the risk was assumed to be hedged. The trader was thus able to pay himself his anual bonus based on the released profit.

    You have to ask yourself why the accounting standards board, like the other regulators, relaxed their standards that allowed the banks to go rampant with money lending. Lobbying is my best guess.

  • Comment number 82.

    So why not increase interest rates? That would end this useless discussion as it would quickly separate meaningful investment from wasting money and provide some long-term focus for the country.

  • Comment number 83.

    The problem with this sort of thing is that it sounds good as a soundbite on the news but enforcing it is virtually impossible. Indeed it may be that it is not even a good idea. Banks may be forced to lend on poor quality deals which is exactly the problem that got us into a mess....Anyway I thought that this was a capitalist and not a command economy.

    We also hit the problem that the Bank of England is moving to restrict the supply of credit as I wrote recently on my blog.
    "I wrote an article elsewhere back in December about the Bank of England’s withdrawal of its Special Liquidity Scheme and the impact I feel that withdrawal around £9 billion per month is likely to have on the availability of credit in 2011 and in particular on mortgage finance. I feel more and more that this move was and is a policy error." http://t.co/X8Hr7wK

    This squeezing of the supply of credit will affect business financing as well.

    It also means that our official policy is at best confused as on the one hand credit is being restricted and on the other ministers are trying to increase it!

  • Comment number 84.

    25. At 10:09am on 7th Feb 2011, Justin150 wrote:

    Ultimately the govt is a Janus.
    ~~~~~~~~~~~~~~~~
    Surely you're not suggesting that politicians are two-faced?

    Well, knock me down with a feather...

  • Comment number 85.

    59. At 11:28am on 7th Feb 2011, Reticent_Trader wrote:

    "It's the old problem of lemons and assymetrical information. Akerlof and Stiglitz."

    Thanks for this - I can now put a name to this idea (it must have passed me by)....although once again frustratingly everything I logically conclude has already been found by someone (usually a nobel prize winner).

    Ah well - at least this means I am in good company!

    Independent thinking that's the key - and not simply taking anyone's word for it.

    I wonder if any of the government economic advisors know of Akerlof and Stiglitz - because they certainly haven't concluded the logical result by themselves!

    Who said the people in charge were clever? - seems to me they're all a little dim. However after seeing the performance (and it was a performance) of the 'Economic professor' on Question time last week - am I surprised we're in such an illogical and unreasoned world desperately clinging on to hope and faith for our solutions?

    I mean economists may understand theories - but understanding the economy is beyond them - mainly because they hardly participate in it - or they have skewed views on what it does because they have only ever operated in a small part of it.

  • Comment number 86.

    ...and it's not just SME's - you wait until the people find out that the next purchasers of their house / flat cannot get a mortgage due to various spurious reasons cited by the banks - despite them having no trouble (if they bought it in the last 20 years)

    I have already seen this happening in my world - we have residents in uproar because they can't sell their flats due to no buyers being able to obtain a mortgage.

    They are so clueless - they haven't worked out the connection between "all that credit crunch talk on the news" and them being unable to sell their flats.

    We're seeing more and more families living in unsuitable flats - no room to swing a cat and no choice but to stay.

    House prices are already at 2003 levels - and reversing fast (from what sales there have been) - anyone who bought after this point (with a interest only mtge) is now in negative equity and stuck.

    The papers may not be reporting this - but sold house prices on the internet can provide some great information for analysis.

  • Comment number 87.

    @74. mullecon wrote:

    "The alternative is a communist style 5 year plan and history tells us that that wasn't very successful either."

    But wouldn't a sensible 5-year plan (avoiding giving it any party-political label) have, among other things, prohibited the re-commencement of housing loans with only 5% borrower's equity - because such would have been foreseen as leading (again) to encouraging irresponsible borrowing/lending and militating against the needed downward adjustment in property values? That's a no-brainer.

    "Planning" doesn't necessarily have to be less intelligent than "the market". The opposite can also be the case. What's so clever about what "the market" has done to the British economy?

    Nor is central planning exclusively a communist idea. It tends to be favoured by those on the left, true, but at times it has commanded almost universal support. In Britain during WW2 for instance, under the premiership of a traditionalist Tory leading a coalition government.

  • Comment number 88.

    74. At 12:00pm on 7th Feb 2011, mullecon wrote:
    We seem to be forgetting that there is a business cycle. Periods of excess risk are followed by periods of excess caution so that the system becomes sustainably mean reverting. Many aspects of the economy eg. house prices, are still nowhere near their sustainable mean, let aone beneath it. Only when this happens can safe growth really begin again. I read in Saturday's FT that new institutions are raising money to fill the gap in mortgage finance so that people can borrow up to 95% of value again. That can only be disasterous. As a country we have to start facing facts. Any attempt to rectify growth before the country has properly deleveraged will result in ever more frequent bubbles and recessions. The banks are just beginning to show us that, for a brief moment, they have learnt their lesson. Like anyone who has been spanked, they hurt. A spoilt child being punished frequently tantrums but failing to carry through the punishment results in an ever more unpleasant beast. The alternative is a communist style 5 year plan and history tells us that that wasn't very successful either.
    -----------------------------------------------------------------

    In previous recessions we have seen property values drop to long-term mean or below and as such the burden has fallen more heavily on the rich as after all property is the basis underpinning most capital and the rich (by definition) own the overwhelming amount of property. Once this redistribution has taken place, the lower cost of purchasing property as well as the lower cost of capital allows growth to occur.

    This recession is different. Because the banks are not allowed to fail, property and asset values need to be kept artificially high. The rich have gotten richer. The burden is falling on the poor. People who did not benefit to the same extent during the boom. Redistribution is not occuring and capital is impossible to come by for most of the population. Growth will not appear.

  • Comment number 89.

    79. At 12:10pm on 7th Feb 2011, Howling_Sheep wrote:
    @35 Reticent_Trader .... I didn't mean to imply that the coming economic circumstances are a *good thing* ... frankly I'm feeling the chill winds myself ... but I do think this is what's going to happen.
    -------------------------------------------------------------------

    I didn't mean to imply that you think it a *Good Thing* but there are lots of people out there who do see it as a good thing, perversely enough. I am also fearful for the future. I can see no way back.

  • Comment number 90.

    #81 you keep repeating this conspiracy theory on the accounting changes

    "You have to ask yourself why the accounting standards board, like the other regulators, relaxed their standards that allowed the banks to go rampant with money lending. Lobbying is my best guess."

    The banks did not lobby for the change they lobbied against it.

  • Comment number 91.

    Of course they'll lend you money - at ridiculous interest rates.
    And Ho Ho Ho here's a laugh:
    The Institute of Directors (an organisation that campaigns collectively for it members) has recommended axing collective bargaining.

  • Comment number 92.

    @81. Reticent_Trader wrote:

    "You have to ask yourself why the accounting standards board, like the other regulators, relaxed their standards that allowed the banks to go rampant with money lending. Lobbying is my best guess."

    My best guess is:- political ideology.

    In 1971 Nixon famously remarked: "We are all Keynesians now." It wasn't true but the fact that a Republican president could say it, and not be greeted with howls of derision, is very illuminating.

    Within less than a decade the entire political climate, beginning under Reagan, had radically changed direction and outlook. The supremacy of the "neo-cons" and of neo-liberal doctrine had well and truly begun. We're still (if not to an even greater extent) under its domination today. Its chief standard-bearers (and beneficiaries) are the mega-banks, but they're not alone.

    In that climate the twin mantras became "the market is always right" and "government regulation bad, self-regulation good". It was proclaimed with fervour by, among others, the then-Chairman of the Fed, Greenspan (who has more recently admitted to having been mistaken, as he contemplated the wreckage left by the financial meltdown).

  • Comment number 93.

    90. At 12:43pm on 7th Feb 2011, Justin150 wrote:

    Interesting discussion between you and Reticent_Trader

    But this intrigued me:

    “The banks did not lobby for the change they lobbied against it.”


    So they used it knowing that it was wrong?

  • Comment number 94.

    The contradiction in banks existing to make money from lending - but then not lending to small businesses -simply reflects the deepseated contradiction at the heart of government thinking.

    Sure banks have tightened their lending criteria quite a bit since the crash - they needed to rein in irresponsible lending, so we should not be surprised at this.

    So where are the borrowers? We hear lots of complaining about not being able to get finance, but are we saying that the criteria should be relaxed again, so risking another bailout at everyone's expense? No.

    So the truth is that there is not a large potenital to expand the small business sector to create jobs and growth because if there is, then the banks would be literally bankrolling it. Why are we surprised at this? With extreme competition on the high street and a large, well developed service sector, why should there be scope to increase the small business sector? Plainly this is a delusion as a policy - the road to nowhere. Great real!

    David Cameron has at least got one thing right - the pressing need to redirect the UK economy away from financial services towrds manufacturing. The problem is that manufacturing is much more about BIG businesses and the prospect of doing what needs to be done to support this sector is deeply unpalatable to the government: import controls, government investment and all that goes with it - can we seriously see the UK Conservatives signing up to the German tripartite system? Hell would freeze over first...

    Cameron & Clegg share their libertarian dream of rolling back the state and allowing vast numbers of small businesses to blossom, creating private sector jobs in a nirvana of low public spending, no public debt and a new era of lower taxes.

    Reality isn't like that - this is a naive, antiquated view of the world which is a MUCH harsher place to exist - globalised economies exploit the lowest common denominator - the cheapest wages get the jobs, goods are made to feed the most profitable markets and investment balances risk against reward.

    Our labour costs are not competitive with third world workers, our businesses don't provide an attractive competitive risk/reward profile and it's only our mass consumer market fuelled by debt that is of any interest to globalised markets.

    And there are very real dangers in persisting with this delusion. The relationship between small businesses and home ownership are clear - many businesses are only possible becasue of the equity in their owners' homes, whilst the myriad of small businesses that service Britain's large owner occupier sector is also substantial.

    If the -0.5% fall in output last quarter is a foretaste of the effect of the spending cuts, VAT hike and inflation cause by devaluing the Pound, then we could see a sharp fall in house prices as confidence evaporates.

    Such a fall would cause a further massive reduction in finance available to small businesses because it would slash the value of home as collateral and it is virtually impossible to get small business finance now without a high level of collateral.

    The bitter ironly is this:

    The banks were reckless and lost thier shirts - the last government had to bail them out or face economic meltdown UK Financial Investments holds this public stake in the banks, now worth £75-85 Bn approx. At the end of the month the UK banks will reveal up to £24 Bn of profits, a good chunk of which will come to the taxpayer in dividends. The government claims our £110 Bn of debt is unsustainable, whilst we own a profit making asset funded with this debt that is providing a higher rate of return than it is costing the UK to borrow the money use to refinance the banks.

    If you take out the UKFI asset, that leaves the UK borrowing barely 5% of GDP - and we could achieve this without any cuts at all by simply selling off the UKFI assets; assets which are being sweated to produce a profit by not lending to risking businesses and tightening loan criteria like collateral requirements

    An uncharitable person might see this as a deliberate policy of screaming about debt whilst knowing the UKFI asset covers a very large part of it, whilst using debt as the excuse to make political choices on public services.

    The real villian of the piece IMHO is the Office for Budgetary Responsibility, which seems to be prepared to endorse a strategy and produce ludicrous forcasts that organisations such as the CBI and Institute for Fiscal Studies Green Budget are implicitly calling into question.

    2m+ NET new jobs - $400 Bn new investment and exports up by a third over this Parliament. If the banks don't lend and small business doesn't grow, how can this performance be achieved?

  • Comment number 95.

    44. At 10:47am on 7th Feb 2011, Reticent_Trader wrote:

    39. At 10:38am on 7th Feb 2011, i wrote:

    I agree as well - exellent post.

  • Comment number 96.

    The 3rd way must surely mean that we don't have to nationalise anything. We already own Northern Rock. This should be given whatever funds are supposed to be available: 'If you have a good track record and prospect of sales but the bank refuses to keep you afloat, come to us'; 'If you are a viable business with short term cashflow problems but the bank would rather you went bust than be reasonable, come to us'; and so forth. It would be an honest man's alternative to the big banks. At the same time it should be made plain that there would be no further support for losses for any other bank than the one owned by the government. This would prevent further tax payer's pearls being strewn in front of 'bankers'. Harold Wilson did this with the Girobank and it kept a lid on things until it was scrapped by politicians with an eye on a seat on banking boards.
    The principle has been tried and tested with the BBC and commercial broadcasting and produces the best in the world. Not nationalised but providing an alternative that can be fair and honest as against the repulsive amoral attitudes of private business.

  • Comment number 97.

    There's no point in trying to force the banks to lend to SMEs as has already been pointed out, the shareholders will revolt because they can't use the money to speculate elsewhere. Returns on lending to business are a long way down the pecking order after credit card or other loans to householders.

    What is needed is a National Investment Bank that can *only* lend to business, as they have in Germany and France.

    We own large chunks of RBS and Lloyds plus the whole of Northern Rock and Bradford and Bingley. So while we need to return these to the market to recoup our massive involuntary investment, why not retain some parts, place into a trust to avoid governments selling it, and start a such an investment bank?

    It would of course need to be profitable and to disappear from the national balance sheet....

  • Comment number 98.

    I found out last week that the parents of a friend of mine who are in their 50's are going to lose their home.

    They still have equity but cannot make the payments on the mortgage now their deal expired. They were living from hand to mouth, from card to card and week to week for the last 18 months.

    The banks no what is coming so does the government and forcing more lending is just the same as printing more money.

    We are entering the phase where the real problems begin.

  • Comment number 99.

    We already have the Financial Services Compensation Scheme and banks gain from its existence. If a bank does not meet targets for lending, they should be withdrawn from the scheme and the money will move elsewhere.

  • Comment number 100.

    86. At 12:28pm on 7th Feb 2011, writingsonthewall wrote:

    "House prices are already at 2003 levels - and reversing fast (from what sales there have been) - anyone who bought after this point (with a interest only mtge) is now in negative equity and stuck. "


    According to the Halifax Price Index and based upon UK overall, the house prices are at Q2 2005 levels. If you look at the individual regions, then it is Q1 2005/ Q4 2004 levels.

    Are you using another index in your 2003 statement?

    Regarding negative equity, one would hope that those on interest only mortgages would have saved the money that would be available from the reduction in interest rate. Assuming of course they were on a tracker and not a fixed rate. If the latter, they took a gamble that interest rates would climb and unfortunately lost the gamble

    Regarding point 53, this re-iterates the issue that has been a cause of reduced recovery in that govts stepped in and skewed the market forces. If they had not have stepped in, as many have said they should not have, then although the pain would likely have been greater it would also likely have been shorter.

 

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