RBS, Lloyds Banking deliberately running down balance sheets
How do you force banks to lend when their best customers don’t want to borrow? Make them lend to their worst customers?
The banks rescued by the taxpayer were forced to promise more loans to business, but they are finding it hard to meet their targets - £16bn extra lending by RBS (LON:RBS) in 2009 and again in 2020 with Lloyds Banking Group (LON:LLOY) increasing its lending by £11bn a year.
But RBS has already admitted it will miss the target and Lloyds Banking is discovering too that as quickly as it increases its lending, its customers pay off their debt.
Net lending is thus going backwards.
However, while the banks complain, that is exactly what they want.
They have a deliberate plan to run down their balance sheets. Regulators want them to increase their reserve ratio – ie, reduce their gearing – and while they can do that by raising capital, the new equity issued so far merely fills the hole in the reserves caused by writing-offs bad loans. The easier way to do it is to shrink the bank by lending less.
This blog revealed in August a private briefing by Lloyds Banking to City analysts in which it said it would reduce its total lending by £300bn – about a third of its balance sheet. It described these loans as “assets outside our current risk appetite”.
Some £140bn will come from customer lending and £60bn from treasury activities, said Lloyds Banking’s finance director.
The forced sale of bank branches and their customers will take about £70bn out of the accounts (unless customers refuse to be sold and return to Lloyds) and other sales may help reach the £300bn target, but clearly the bank is reckoning on cutting lending severely.
And it is being helped by customers keen on cutting borrowing. Despite record low interest rates, the lessons of the last decade have made healthy corporates wary of high gearing. The moaning that enterprise minister Lord Sugar complained off is coming from the unhealthy companies that want to increase or renew borrowing but are refused by their bank.
Lloyds has just launched an “SME charter” aimed at helping small companies create jobs. There will be seminars every working day across Britain to advise on start-ups, exporting and winning contracts. If it is more than a gimmick it may help make small firms better businesses and thus make them more suitable borrowers.
But if companies want to borrow only as a substitute for cashflow or finance losses rather than pay for expansion, the banks are right to refuse. This is taxpayers’ money they are risking and if the past decade has taught companies the dangers of borrowing, hopefully it has taught banks the dangers of lending.
