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Back to the piggy bank

Douglas Fraser | 10:07 UK time, Thursday, 25 February 2010

Good old-fashioned thrift is holding back the economy, we're told.

Today's Royal Bank of Scotland annual results show how much we're on a savings binge.

It's reporting another one million customer savings accounts over the past year. More significant is the £49bn of arranged overdrafts with business clients which is not being used.

With foreign banks busier in the British market-place than had been expected, RBS is using those factors to explain its failure to hit the business lending targets set by government.

Facing claims that it's constraining lending too much, it says it's approving 85% of loan applications - "consistent with previous years".

Its claiming that nearly £80bn in gross new lending to households and businesses means it's put more than twice as much credit into the market than Barclays.

An independent referee between banks' claims they're lending, and customers' claims they're not, is Bruce Cartwright, accounting partner at PricewaterhouseCoopers.

He says he's hearing lots of complaints about the pricing of credit, but not about its availability.

The key for businesses, he says, is to be clear what they need the money for: "Sometimes, companies are not clear themselves. There's a difference between seeking money to prop up losses you've incurred, and saying 'I'm coming out of recession with increased demand, so I want to stock up'. Credit processes will be more robust, so you have to have your facts together".

He adds that banks want thriving customers. If they are too keen to put them out of business, then the bank won't be around for long.

And facing nearly £14bn in impaired loans last year - the measure of RBS's exposure to problems in the wider economy - it will have to hope it's right when it says that has now peaked.

Squirrelled away

The shift from excessive borrowing by households and businesses to a startling rise in savings is a key factor shaping the state of the economy.

That was underlined by the most recent forecast for the Scottish economy from the Fraser of Allander Institute at Strathclyde University.

It shows that the household savings rate is up to more than 8%. At the start of 2008, before the downturn, that figure was negative. That saving is not just money being squirrelled away. It's debt being reduced.

In particular, there's been some evidence of mortgage holders using the opportunity afforded by low interest rates to lower their principal loan.

In the business sector, you get some idea of the savings from the disappearance of £200bn of newly-created money onto balance sheets.

According to Professor Brian Ashcroft, of the Fraser of Allander Institute, the surge in new money might have been expected to boost the money supply.

But because the quantitatively eased money is being used to strengthen balance sheets, that measure looks flat.

You can see its impact on RBS. The bank has shed nearly £700bn in assets in one year, leaving it with more than £1.5 trillion on the balance sheet.

So while that helps explain the increase in its capital base, known as core tier 1, that newly created money will have helped raise the capital base ratio - sharply up from 6% to 11% in a year.

Does that mean quantitative easing has failed? No, says Ashcroft - without it, we'd be deep in economic depression.

Bank job fears

The Fraser of Allander forecast for jobs suggests Scotland is probably close to a peak for unemployment. The most recent figures for those seeking work between October and December were at 206,000.

The forecast, though hedged about with uncertainty, is for a peak of 216,000.

Break that down, and the economists say the finance sector is due to lose more than 16,000 jobs this year alone. Yet it's reckoned only around 4,000 have been announced so far.

Does that suggest some big job losses announcement to come? Don't worry, just yet.

The economists are extrapolating from big picture figures, rather than offering inside knowledge of banks' plans.

RBS says it's already done its "heavy lifting" on shedding jobs.

There's less clarity on Lloyds Banking Group's plans.

But until it's sorted out the continuing multiple merger of Halifax, Bank of Scotland, Lloyds and TSB - with the Lloyds TSB Scotland element now on the market - and until its aligned its IT systems, the bigger job loss announcements may be postponed.


  • Comment number 1.

    I needed a loan desparately, the RBS interest rate was too high. Even though I have banked with them for greater than 30 years, I ended up going to someone with a cheaper rate!

  • Comment number 2.

    Maybe RBS should get off its rear end and go looking for loan and investment opportunities...

    There are plenty of start-ups, spin-outs and early stage companies looking for risk equity capital.

  • Comment number 3.

    It is not thrift. It is the realization that the governments have failed to institute any changes that would protect the depositors from a diminishing of personal wealth by the gambling of banks with their money. Why would someone invest in a home or commerical property that may be devalued less than the loan. This all remains unsettled and the people understand they were betrayed by the banks and the governments. There is no confidence because that confidence was betrayed. The governments appear to be controlled by the banks and have been unwilling to enact the regulations that will make the individual feel they will not be subject to continued abuse by the banks.

  • Comment number 4.

    Banks have spent the last year calling in loans and putting businesses in trouble. Then they have the cheek to suggest - and you seem to be agreeing with them - that people are on a "savings binge" and businesses don't want to borrow. Try asking for a business loan at any bank at a fair rate without rip-off arrangement fees and other onerous conditions and see how far you get. Banks curtail everything except bonuses. Caledonian Comment

  • Comment number 5.

    "Good old-fashioned thrift is holding back the economy, we're told."

    Whereas toxic debts did what exactly to the economy?

    And all the while bonuses just flow and flow.....

  • Comment number 6.

    Being the kind of person who thinks being in debt is a bad thing and prefers to wait until they've saved enough money before buying something, rather than using credit (hence why I'll never have a credit card), I'll never totally understand the notion that saving money is a social evil. It'd be quite funny if after years of anti-capitalist campaigners trying to bring about the downfall of capitalism, it was actually brought to its knees by the nation becoming a bunch of tightwads.

    However, I find it particularly odd that people are saving just now anyway. Have these people seen the interest rates on savings accounts? Storing it under the bed instead of in a bank doesn't sound quite so ridiculous at the moment...

  • Comment number 7.

    Why anyone expects banks to lend money to businesses that are about to go under is beyond comprehension. The banks are just dragging themselves out of debt and the politicians want them to throw good money (ours) after bad . If the banks won't lend somebody money, it's because they see them as a bad risk, not as a way of making money, which is what banking is all about. The banks don't need debtors, they need savers, and until interest rates go up , these will not be forthcoming, and the banks will be loath to lend money.

  • Comment number 8.

    If you need examples to refute the bankers’ claim that they are lending, This is Money has profiled two cases; in both cases the businesses are already established and have revenue, so I wouldn’t say they’re any riskier. Also in both cases, the businessmen applied to several banks and failed to even get a quote.
    In the end one had to get the loan from a Belgian bank, which had so much faith that they loaned him more money than he’d initially planned to get.
    Am sure if a survey was done, there’d be many more cases like those.

    As for households, Bruce Cartwright is right on the pricing of credit; these days many more people are scored low on credit scores making them only eligible for poor credit loans, breadmarket has done a comparison of them and I can’t imagine anyone being happy to pay rates of 40 - 200%.
    Right now if it’s not urgent, it’s better to wait and see if things improve rather than being stuck with a highly priced loan for 5 years.


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