There are reasons that banks are not lending
Vince Cable certainly thinks outside the box. After the mansion tax and graduate tax, the business secretary is now mooting allowing banks to pay bonuses only if they lend. But what can look like creative thinking from an Opposition politician can be plain daft from a government minister.
The bonuses that ministers past and present have failed so spectacularly to curb are not paid to the boring bankers who lend money to businesses, but to the investment bankers who buy derivatives, raise capital or shuffle shares. Some investment banks do not even bother with lending.
To curb a proprietary-trader’s bonus because a separate side of the bank is not lending enough to small companies would thus be unfair at best and impossible at worst.
And even for the lending bankers, the post-crash culture says bonuses should not be given on the volume of loans given but – several years later – on the sums that are repaid. Bonuses are now meant to reflect bottom line, not top.
Banks are not lending as much as ministers would like because they have been told to raise their capital ratios: that means either less lending or more capital, and while banks have raised considerable sums of new money since the crash, that was to fill the holes caused by previous bad lending. Lifting lending would mean a new round of equity raising. Cable suggests using dividends or bonuses to boost reserves but most banks have already cut their shareholders’ payments and bonuses, while large individually, are small corporately.
But even if the supply of funds is reduced, so is demand. Companies in general reacted to the crunch by reducing debt and hoarding cash: most firms that want loans can obtain them – at a price that reflects the reappraised risk – and the few that complain to the business secretary of difficulties are ones that the banks do not want to lend to – and probably should not have been lending to before the crunch.
Banks will make mistakes but it is inevitable that would-be borrowers assess the risk lower than lenders do.
The supply-demand balance for loans appears worse because of the withdrawal of foreign lenders from the UK market. British banks are now having to lend to their own old customers and also to those previously serviced by overseas banks.
Cable’s team talks of making the banks sign voluntary agreements to lend, with a threat of legislation if they do not, yet the joint paper from the Treasury and Department of Trade wisely makes no mention of such proposals. A bank cannot be forced to give a loan it does not want to and while state-controlled Lloyds and Royal Bank of Scotland have agreed targets, they have both failed to meet them, blaming insufficient suitable demand.
The banks have become immune to rhetoric from ministers. Remember Alistair Darling’s summits called to bang bankers’ heads together? Cable is in danger of ruining his image for common sense in pulling too many unworkable ideas from his brain box. He needs to work out what the problem on lending really is before he devises another solution.
