Opinion: This could be the historic moment the banks shift

Tuesday will see one of those moments which may prove a turning point in the development of an effective UK banking system.

That is the day that the banks will reveal the geographical spread of their lending, down to 9,000 different postcode levels.

It is the culmination of a major effort by Lib Dems in the House of Lords earlier in the last two years, with a great deal of help from elsewhere, to make sure that this happened.

It is also a creative moment of possibility – not to criticise the banks, because they need to be given the credit for this openness, but to see how it might shape policy in the future.

The Americans have used geographical lending data since 1977, in their Community Reinvestment Act, to determine how much the big banks must pay to build a local lending infrastructure – of community banks and community development finance institutions (CDFIs) – to lend where they find it difficult.

In the UK, in contrast, we have had a succession of measures – Project Merlin, Funding for Lending – which have not persuaded the banks to lend more in the critical SME sector.

This is largely the fault of the politicians: they find it hard to accept that the big banks are no longer geared up for SME lending – except, as the figures will show on Tuesday, in the south east. They have no systems, no local intelligence, to price that kind of risk.

The implication is that, where they are unable to lend, they must fund the infrastructure to make lending possible. That is the way forward, and a potential Lib Dem solution to re-balancing the economy.

But it is already clear that the banks will struggle. Their fightback is already clear: they will say that Community Reinvestment Act (CRA) lending caused the sub-prime meltdown.

They must know this isn’t true. The Federal Reserve investigated it and found that, actually, CRA-backed loans were half as likely to default than those loans made by institutions which had opted out of the CRA.

In fact, CRA lending was an insulation against financial meltdown. And if you don’t believe me, read the findings:

E. Laderman and C. Reid C, 2008 ‘Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown’ Working Paper 2008-05, Federal Reserve Bank of San Francisco

So why are the banks peddling this nonsense, when they know it isn’t true – and when they operate inside the CRA framework themselves in their US subsidiaries? I couldn’t possibly comment.

But let me make this prediction. Within three years, the UK banks will be happily operating a related system, financing a new local lending infrastructure – which can genuinely rebuild local economies.

Ad they will do so willingly, because it allows them to end the argument once and for all about whether they lend enough to SMEs.

* David Boyle is a former Lib Dem parliamentary candidate and the author of Tickbox (Little, Brown). You can buy the book from Hive or Amazon.

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3 Comments

  • David Evans 16th Dec '13 - 9:20am

    Sorry David,

    You are just too nice. The banks have deliberately moved out of difficult areas of lending (i,e, areas that take skill and effort) in the drive to reduce costs. As a result, they have moved out of business lending except where backed by massive assets (i.e. usually houses in the South East). However, they still want the big profits. Politicians have been too weak on this for decades and this analysis by postcode is just another sticking plaster.

    Now having an analysis of lending that has not been secured on land or housing, analysed by post code and industry sector might just be useful. But that would cost the banks a bit of money. So I don’t see it happening.

  • Gwyn Williams 16th Dec '13 - 12:10pm

    In the 1930s although SME businesses could borrow at 2 percent, it was rare they would use a bank. It meant having to find a wealthy individual who was prepared to risk their money for a better return than offered by a bank. I suppose today is would be called p2p. Banking has to become dull and boring. It means having branch managers who know who their customers are. People who visit the business to understand what is going on there. Who are given discretion to make their own lending decisions.Rather than charge £50 to leave their office then try and sell an inappropriate financial product and finally have to refer the real decision up the line to “computer says no”.

  • David Boyle 16th Dec '13 - 1:40pm

    David, by itself postcode analysis is bound to be sticking plaster. It needs to be used as the basis for working out what each bank should contribute – to building a local lending infrastructure which can lend effectively to small business. Yes, it will cost the banks money – but at least it will be money extracted from them for a useful purpose, unlike Project Merlin or Funding for Lending.

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