18 Comments

• Andrew Ducker 2nd Aug '12 - 2:41pm

  There’s something about this that troubles me. If banks aren’t lending to businesses then it’s because they view them as being high risk for repaying them. Lending to people who weren’t able to pay it back was the prime cause of the recent banking boom/crash.

  So why do we think that loosening lending requirements is a good idea now?

  I’m serious, can someone explain it to me?

• Simon McGrath 2nd Aug '12 - 2:48pm

  Banks being forced to lend. Bonuses presumably dependent on lending targets .
  What could possibly go wrong ……

• Richard Dean 2nd Aug '12 - 3:19pm

  First reactions again, sorry! Perhaps “does not seem to understand risk” would have been more polite than “is an idiot”!

• jedibeeftrix 2nd Aug '12 - 4:31pm

  “Banks lend when the potential profit they make, through receiving interest, is greater than the risk they take that borrower will default. His job is to arrange either that the profit be larger or the risk be smaller or both.”

  Happy to agree with Richard.

• Liberal Eye 2nd Aug '12 - 5:46pm

  @ Andrew Drucker

  From what I hear a big part of the problem is that in the boom years the banks basically got out of the tricky business of lending to small business in favour of the musch easier and cheaper lending on property (which can be done by cheap compter-scored algorithms rather that expensive and experienced bank managers). Such small business lending as they do is mainly (almost entirely?) thinly disguised property lending where the business or its owner can provide property as security rather than the future cash flows.

  In other words, the banks may no longer have the human infrastructure to lend to business however much they want.

  As for the recent past the lending went crazy. The assumption was that property prices would only go up – which of course they did as new buyers entered the market with ever larger mortgages. A similar thing happened to lending to Ireland where it was assumed there was no exchange risk vis a vis with other eurozone countries like Germany.

  Put all this together and the banks have failed at both the big picture level and the local level to assess the risks in their lending. I see no reason why they should be presumed to know any better now.

• T-J 2nd Aug '12 - 6:09pm

  Banks lend when they *think* potential profit exceeds the risk, and they are by no means infallible when it comes to deciding when this is the case. In a time when confidence is so low, a business that would ordinarily be a perfectly good investment is turned down as bankers become more risk averse. Businesses that are on paper perfectly sound end up going under because of this crisis of confidence and the recession is entrenched, each subsequent failure acting to confirm bankers’ fear that now is not the time to lend.

  A state bank ‘picking winners’ will obviously make a lot of loans that end up going bad and resulting in bankruptcies down the line. But if the idea works then those state investments that have only postponed failure will become isolated failures occurring against a backdrop of wider economic recovery and growth, rather than confirmation of a self-reinforcing downward trend. And you never know, some of it might even be successful.

• Liberal Eye 2nd Aug '12 - 6:17pm

  I understand Vince’s frustration. The stories I have heard are frightening for what they say about future economic performance etc and he must have heard much worse so I think he understands risk very well – one the one hand some risk of bad lending (but on a tiny scale compared with the recent past) or on the other hand an economic meltdown. The GDP figure for last quarter shows how critical the situation is.

  But … the banks, especially probably RBS, are still loaded with unrecognised bad debt in vast quantities. A eurozone collapse (the timing is hard to call but probably this autumn) will force the write down of tens, perhaps hundreds of billions of pounds of extra losses so perhaps this is not the time to buy extra shares.

  The only way banks are going to be healthy again is if they are reborn with a clean balance sheet, new management and a radically different regulatory environment – what one might call Vickers ++. But Osborne will never wear that even though his current policy is such an utter failure.

• Hugh 2nd Aug '12 - 9:00pm

  Liberal Eye – I think you are correct on this one. The banks did not have the “human infrastructure” before the crash, and I have not reason to think they have improved their position.

  Before the crash I had need to seek small business finance of 100K and went to 4 High Street banks. Three asked for business plans and accounts for central “business units”. All offered similar deals with a high rate of interest, large fees, and demanded a charge over my house. The fourth asked for advanced information and sent a person to see what we wanted to do, how the money would be spent, and offered the lowest rate of interest, the lowest fee and did not ask for a charge over my house.
  The three banks went bust. The one which lent us the money did not need a bailout.
  And the business ? It is still trading with a steady profit.

  Banks like any business want to maximise their profits. They do it by lending at the highest rates, charging the biggest fees they can get away with and minimising the downside. If they do not understand what they are doing they make mistakes and lend to the wrong customers. Or diverting funds from solid boring business to speculation. The Vickers Report should be acted on. Sadly Osbourne does not agree – I judge him by his actions not his words.

• Richard Dean 2nd Aug '12 - 9:20pm

  If banks have lost the relevant human capital, then why would RBS be different? And why isn’t Vince developing programs to restore that capital?

  First the problem is that firms have cash mountains. Next the problem is that firms need loans that they can’t get. When will this government stip blaming someone else for their errors? If I had money now, I would have virtually no incentive to risk it on developing a business. The risk of losing the lot is worse than the certainly of losing a small amount through small inflation. The same is true if I had no money but collateralisable assets.

• Catherine 2nd Aug '12 - 9:46pm

  If I had money now, I would have virtually no incentive to risk it on developing a business. The risk of losing the lot is worse than the certainly of losing a small amount through small inflation.

  Very true on an individual level, but the trouble is that if everyone follows that logic and sits on their money until the economy improves, it never will improve and we’ll be stuck in Japanese-style stagnation until someone takes a risk with their money.

  Obviously, private individuals (except very wealthy ones) aren’t in a position to single-handedly stimulate consumer confidence, but banks sitting on hefty sums of bailout cash certainly are. And as @T-J explained above, the businesses they’re currently refusing to lend to aren’t necessarily unviable.

• Richard Dean 2nd Aug '12 - 10:50pm

  I suspect that banks are NOT sitting on helfty sums of bailout cash. Those bailouts were to cover losses and to get the reserve ratios back to safe levels.

  Is this really a crisis of confidence? My impression is that the main message coming at the general public is that they have to get their levels of debt down, just as the government thinks not has to get its debt down too. There are also signficant redundancies happening in the public sector, driven by government. With these messages, any sensible person stops taking business risks and hunkers down till things get better. It’s not confidence, it’s the savings trap transformed to a debt context.

  Economists don’t seem to have proper models for this at all. Y=C+I+G doesn’t seem helpful. People speak of boom and bust as if they were part of a natural, rather smooth cycle of economic life, whose courses can essentially be modelled by differential equations.Catherine has well remarked that boom and bust are not that at all. They are two stable states, and catastrophe theory looks more like the proper way to model them.

  Which means that we escape bust by applying a severe shock. I wonder what it might be. One possibility, could be widespread riot, as indeed is beginning to be seen. This would increase the risk of damage to assets, and so encourage owners to make productive use of assets. Another possibility would be a miltary coup d’etat, not an impossibility in the UK. The result could be a centrally planned economy in which everyone has an income but the goods on offer aren’t necessarily what everyone wants.

  Could Vince and co please arrange some shock that is a bit less devastating than these might be?

• Dave Simpson 3rd Aug '12 - 8:24am

  I run our printing society, and as such was recently phoned by our bank offering us a loan – so they are trying to lend to small businesses etc. – at least to those they percieve as good risks (we have always kept a minimum of a few hundred pounds in our account.) Before anyone asks, the bank concerned is Barclays.

• Jonathan Hunt 3rd Aug '12 - 2:31pm

  WHO ARE THE BANKERS IN THE BLACK? Exclusively privately owned ones, whereas those subsidised with public money can continue to soak the taxpayer to pay for their past misdemeanours — and a lot of their current ones.

  If we really want to get the banks to lend to small business, why not impose a windfall tax on cash held above sensible, agreed reserves and other money not properly or fully employed, with the option of avoiding the tax on money lent to SMEs?

  And when the Libor scandal is unveiled, it will be time for mass compensation of the assets of banksters who gained from it. A side benefit would be to reduce the cost of country estates and posh London abodes.

• Jonathan Hunt 3rd Aug '12 - 2:51pm

  And when the Libor scandal is unveiled, it will be time for mass compensation (sorry CONFISCATION) of the assets of banksters who gained from it.

• Psi 4th Aug '12 - 6:22am

  The most effective way to increase lending would be to negotiate a longer implementation of the new capital requirements on banks so there is less need to restrict lending to meet regulatory requirements.

  This would heave to be a realisticly set time scale agreed by everyone involved in setting the new Basel requirements.

• Psi 4th Aug '12 - 6:26am

  @ Jonathan Hunt

  Are you suggesting that companies with reserves in cash waiting for (or looking for) opertunities to invest should be penalised?

• Jonathan Hunt 4th Aug '12 - 11:04pm

  Yes. Much of that money was made available to lend to small firms.

• Richard Dean 4th Aug '12 - 11:32pm

  Companies that have cash reserves have earned that cash from work. That money is owned by those companies. It might be used as bank reserves, but it is not the same as money made available by government so that banks can lend.

  In fact, was any money at all made available to banks so that they could lend? They were bailed out to the extent that their existing losses did not cause them to crash, and perhaps to help regain safe reserve ratios. But after being saved from losses and regaining safe reserves, a bank is still not in a position to start new lending. By law, as I understand it (and I may be wrong), a bank has to have some more money coming in that it can then use as the additional reserves that are needed to support new loans.

  Perhaps someone could comment on whether this is correct? And is it possible that Osborne and Cable might have actually not understood what they were doing? Or perhaps the banks were in worse shape than they let on?