A welcome boost - unless you're a bank


If you ask most economists why the UK economy has found it so hard to put the financial crisis behind it, high on the list would be the banks.

Laden with debt, banks are simply more reluctant to lend to ordinary households and firms than they were in the years before the crunch.

But the Financial Times (FT) believes that at least one banking hangover from the boom years has actually been doing the economy some good this year - maybe more good than the government initiatives to spur growth announced at the time of the Budget.

The UK's five largest banks have had to set aside nearly £9bn to cover claims for selling customers unnecessary payment protection insurance (PPI) on their loans, of which nearly £5bn had been paid out to customers by the end of May.

At one level, it looks like a simple transfer of money from the banks to households: our gain is the banks' loss.

But economists at the National Institute for Economic and Social Research believe total payments (which could reach £15bn) could end up boosting the country's growth by more than 0.2% of GDP. That's because households are more likely to spend that money than the banks, especially in a depressed economy.

Needless to say, that figure is highly speculative.

And it doesn't take into account the fact that banks making the payments might then be even more reluctant to lend. But, if it is even roughly right, it would mean that the PPI scandal will rival or surpass the Olympics in its short-term impact on UK national output.

The FT somewhat cheekily points out that the Office for Budget Responsibility did see fit to incorporate the impact of the bank payouts on household incomes, in its revised economic forecast at the time of the Budget. The OBR did not choose to make any similar adjustment as a result of the schemes to boost growth unveiled by the chancellor at the same time.

The chancellor would say the comparison is unfair. Most of the schemes he presented in the Budget were not expected to come into force for some time, and their impact was inherently difficult to predict. By contrast, the PPI payments were, by the time of the Budget, very much a known quantity.

But the basic point of the FT article still stands: the PPI scandal might be bad for the banks' reputation, and their balance sheets, but it is now putting money in people's pockets at a very useful time.

In a depressed economy, most would say that any boost is welcome, however unlikely the source.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 11.

    SF: 'Laden with debt, banks are simply more reluctant to lend to ordinary households & firms than they were in the years before the crunch.'
    ~ ~ ~
    Many are repeating this, Steffie, but is it true?

    Banks can make a huge margins on lending, particularly unsecured, at present.

    I'd suggest that stories of the 2/3rds of UK popn who carry debt are paying off as much as possible are more likely.

  • rate this

    Comment number 10.

    'banks making the payments might then be even more reluctant to lend'

    Well, they shouldn't mis-sell products!
    And, how can they be more reluctant to lend? The money they are reluctant to lend is taxpayers money given to them at low interest rates so that they can mark it up by 4% ++ before they 'lend' it back to the very people who gave it to them.
    Organised crime the Mafia would be proud of.

  • rate this

    Comment number 9.

    ' That's because households are more likely to spend that money than the banks, especially in a depressed economy.'

    So why is the BOE and Government wasting money by lending it at low interest rates to banks who either:
    a) Hoard it
    b) Give it to 'shareholders'
    c) Lend it to us at a 4% plus mark up
    d) Award themselves bonuses for receiving low interest rate loans

    It's pouring petrol onto a fire

  • Comment number 8.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 7.

    what we have been lacking since 1997 is an industrial policy,
    an education system that works and allowing 5-8million to be "out of work" for long periods and couple with a open door imigration system.

    the only growth induxtry is gambling which labour got wrong,

  • rate this

    Comment number 6.

    I always said some of the QE money should have been spent by UKGov on equipment (largely) made in the UK and the rest used to increase state pensions.

    If we make the banks pay out for all their other schemes for ripping us off, we might have a recovery?

  • rate this

    Comment number 5.

    we have massively over priced houses that have locked many in2 high mortgages. only way is down to about 66% of current prices BUT that will causes lots of problems in itself.
    then somehow we need a policy of built in britan & exported. policy of substitutuion for imports and that is going to take a long long time.

    Adding more debt is only goign to make the final bubble burst even bigger

  • rate this

    Comment number 4.

    So what they are saying is, if more of the money that exists is actually in the economy rather than stowed away in banks, then it can actually get used? I see nothing gets past the national institute!

    Next they will be saying something crazy like 'you know what, all these high house prices have done, is hand too much disposable income to banks and thus caused the economy to cease up' -__-

  • rate this

    Comment number 3.

    where do they think the anks money comes from ,

    the commissions have already been spent , so the pay ack will come from charge on current transactions , rob peter to pay paul so it will have zero effect on the amount of economic activity

  • rate this

    Comment number 2.

    Curious timing - the unveiling of 'wrong-doing' by rich institutions.

  • rate this

    Comment number 1.

    So the spin doctors have found a positive spin on this huge banking rip off.!!!!!
    Why don't the banks just do banking well??? Realistic lending rates and realistic deposit rates!!!! Whatever happened to "Safe and Dependable"??????


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