The budget and the banks

We were told in advance of the budget yesterday that RBS and LLoyds are going to be made to lend more. We were given early warning of legislation to force all banks to offer basic bank accounts to anyone who wants one.

Maybe the government has been listening to those of of us arguing that the private sector is still being starved of reasonable lines of credit at affordable rates. Unfortunately the idea that you can simply instruct a couple of banks to lend more is not going to work. They have told them before to lend more. Just bellowing it across the media again, only louder, is not going to bring it about. The government needs to ask why lending to companies and individuals is depressed.

The first thing they should learn is that the Banking regulator wants private sector lending to be depressed. The Regulator is insiting on the banks holding more cash and capital relative to their lending. They are doing so at the wrong point in the economic cycle. Banks are reining in their credit and balance sheets to comply. If the government wants more private sector expansion, they need to tell the Regulator to back off.

The second thing they need to grasp is economic conditions are still quite hostile for many companies, so they are paying back debt rather than committing more money to investment. They do not see a strong recovery, so they are not spending more on facilities, machinery and stocks. There is a vicious circle in the private sector. A shortage of demand means no incentive to invest. A shortage of cash means no wherewithall to invest.

This vicious circle is reinforced by the speeding decline in living standards. Relatively high inflation by world standards is leaving many families worse off, as wages and salaries are going up by far less than prices. This means less home demand for domestic businesses. The public sector is taking too much of the limited national income. The private sector is further depressed by fears of tax increases to come to pay for it all. It’s going to take some tax cuts to boost spending power and some reductions in public sector waste and over spend to instill more confidence. Lecturing the banks will not do the job.

Bank accounts for all may not be as popular a policy as Labour like to think. Some people who do not have bank accounts may not like banks or bankers. The government needs to think through how it would enforce it. Are all banks with a licence under an obligation to give anyone an account who applies, regardless of their size and their specialism? Will they regulate the charges, or can banks put people off by charging too much for certain kinds of customers? How do you regulate the full panoply of charges? How do you avoid the regulation stifling competition?

This is all probably just more gesture politics. I am not sure even the government takes itself seriously any more. We need an election. Before that nothing sensible is goling to be decided.

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29 Comments

  1. Antisthenes
    Posted March 24, 2010 at 9:02 am | Permalink

    Another ill thought out idea, there are so many about, the UK is drowning in them. Poor people to have bank accounts that banks can not refuse which normally would be refused for a myriad of common sense and financial reasons. Does nobody remember when lenders were forced to give mortgages to poor people (Clinton) and the dreadful consequences of that everybody is still living with the mess of that one and we haven't even begun to clean that up. This pursuit of socialist principles and unprincipled vote buying is going to be the economic end for everyone and who will suffer the most? The poor of course.

  2. alan jutson
    Posted March 24, 2010 at 9:15 am | Permalink

    Those who do not have a Bank account now, may find that they do not have the necessary paperwork to open one.

    If you cannot prove your address with a utility bill, Council tax bill or fixed line telephone bill, offer identity proof with a passport or similar Photo identity which also shows your address, then Banks are reluctant to do business.

    So those who have recently moved or who are homeless, those who have no driving licence or passport, those who have been made recently bankrupt, those with poor credit rating (even if you are not asking for a cheque book account) may find it a different world from our politicians.

    • APL
      Posted March 24, 2010 at 1:05 pm | Permalink

      Alan Jutson: "If you cannot prove your address with a utility bill, Council tax bill or fixed line telephone bill, offer identity proof with a passport or similar …"

      Thank the government 'anti money laundering' laws. Odd how they don't seem to apply to financial transactions of MPs who have been claiming expenses always within the rules, of course.

    • David B
      Posted March 24, 2010 at 4:01 pm | Permalink

      Money laundering legislation prevents banks from opening accounts for people with no proof of address or ID.

      • APL
        Posted March 24, 2010 at 11:31 pm | Permalink

        David B: "Money laundering legislation prevents banks from opening accounts for people with no proof of address or ID."

        In a word, Yes!

        David, perhaps you are a youngster, I can't easily tell, but I can remember when all you needed to open a bank account was a couple of crisp £5 notes.

        You gave the bank your money, your home details, a week or so later they sent your cheque book and £50 guarantee card to the address you stipulated. That was pretty much that!

        Now, as described, you need a utility bill, council tax bill, some other form of identity, these are not for the banks, these are to comply with the ML regs.

      • alan jutson
        Posted March 25, 2010 at 9:21 am | Permalink

        APL, David B

        Yes fully aware of Money Laundering laws, as I am the one responsible for its implementation within my Company.

        The point I was making is that are the Banks going to have to relax these rules in order to comply with this new Government policy.

        Similar conundrum to the Banks being told to lend more, but at the same time build up reserves.

        Are we going to get them opening bank accounts for people who have little proof as to who they are ???????.

        I doubt it.

        All this proof of indentity has now gone too far.

        I spent 45 mins in my own Bank this week, trying to open another Account paying a slightly better ratye of interest, but had to go through all the usual nonesense (of proof) when I have banked with them for over 30 years.

        Likewise when I went to collect my late Mothers Will from our family Solicitor, I had to again prove my identity even though we have been clients of them for many years, and I took along the enduring power of attorney forms signed by them.

        Reason given, we have not seen you for 6 months.

        Its Big, Big Brother, who wants to know your every move, and that is one of the reasons why the Government wants everyone to have a Bank Account, the other is it probably helps with direct payments of benefits or pensions.

        • David B
          Posted March 29, 2010 at 8:03 pm | Permalink

          I am an accountant and I help SME’s with banking arrangements and am fully aware of the money laundering act. It is potentially one of the worst pieces of legislation passed in the last 13 years (and I know that is saying something). The act was intended to stop organised crime benefiting from the proceeds of crime. It has largely failed in this, but has made the life of the law abiding very difficult and imposed some very onerous responsibilities on banks, accountants, solicitors, etc.

          My point was more fundamental, the chancellor “Instructed” banks to open accounts for people without the required identity information, but this instruction is only an empty statement. The problem, as I see it is as follows:

          1. He must change the law, admitting the Money Laundering Act is adversely affecting the law abiding. Something that cannot happen before the election.
          2. He is aware of the current legislation preventing the opening of bank accounts for people without ID , but does not care, and will claim the banks have ignored his instructions.
          3. He is unaware of the current legislation

          This single policy sums up the vacuum at the heart of the budget. The chancellor was more interested in headlines than focusing on real policy.
          .

  3. Matt
    Posted March 24, 2010 at 10:16 am | Permalink

    This recession is unlike any other that I can recall.
    People in secure employment, state or private sector, are benefitting from, low inflation and low interest rates. Contrast this with the last two recessions, mortgage rates shooting to 15% or thereabouts.

    Mr Cameron isn’t getting his message across; he talks around the fringes a lot.

    He has put down no clear strategy as to how the Conservatives will deal with the economy.

  4. Acorn
    Posted March 24, 2010 at 10:37 am | Permalink

    "The Regulator is insisting on the banks holding more cash and capital relative to their lending". (JR).

    In the following link, there are statements such as:-

    1) Lending comes first and what little reserves there are (if any) come later.
    2) There really are no excess reserves.
    3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely "fictional".
    4) Banks are capital constrained not reserve constrained.
    5) Banks aren't lending because there are few credit worthy borrowers worth the risk.

    It also infers that Banks' capital, may be a lot less than they are currently having us believe!!!
    http://globaleconomicanalysis.blogspot.com/2009/1

  5. Trevor Clements
    Posted March 24, 2010 at 10:41 am | Permalink

    In addition to the excellent thoughts from JR and the two additions, my contribution is from the baseline of a branch banker in the 'old days' when selling services was just beginning to emerge as the sacred cow. Thirty years ago, my bank (NatWest) decided to introduce a simple, no nonsense card and technology controlled account for the great unbanked. It was designed and targeted for those that use customer facing technology for everything else – even then. The result? Zilch! The target audience didn't want a bank account.
    Yes, the situation is different now, but if you want a bank account and can supply the documentation, it's done.
    To many people just thinking about operating a bank account is a problem – they would rather have cash in their hand!

  6. Olaf
    Posted March 24, 2010 at 11:43 am | Permalink

    I thought, maybe I'm wrong, that everyone was entitled to a Post Office account for receiving benefit payments.

    As for the economy and businesses. Well I pay more of my income in tax and energy bills (electricity, gas and petrol) than ever before therefore I will spend less on goods and services.

    Personally I'm seeing more businesses close now than at any other point in the recession. On paper the recession might be over but in the high street it's only just getting started.

  7. Max Van Horn
    Posted March 24, 2010 at 12:00 pm | Permalink

    John..this government is communist.You can analyse the economics untill the cows come home, but it will not alter one iota, the underlying philosophy driving the whole thing.We need a fresh start. I'm going to ground and not working, or saving untill the madness stops.

  8. Posted March 24, 2010 at 12:02 pm | Permalink

    Above all the discussion remains the unpalatable fact that millions are over-extended and unable to service present debt, let alone more borrowing. Bit like the Government, of course. Everyone seems to be in denial about how awful things really are!

  9. lola
    Posted March 24, 2010 at 12:20 pm | Permalink

    There seems, if you look at the pattern of history, a direct correlation between the growth of structural unemployment in the UK and the growth of the 'social democracy' ( a tautological phrase in my view). F'rinstance, the more you inflict stuff like the basic account nonsense on enterprise the more jobs you lose. And the more you 'protect jobs' the more uncompetitve you get and the more jobs you lose.

    The basic accounts stuff will just cost us all more money and destroy more jobs.

  10. JimF
    Posted March 24, 2010 at 12:38 pm | Permalink

    This of course is a precursor to taxing income by direct debit…. Communism with a friendly smile, and a jumping horse.

  11. Norman
    Posted March 24, 2010 at 12:45 pm | Permalink

    It's tragic that we even have to enter discussions like this – if this is what nationalising industries does for us then no thank you.

    I don't believe government knows better than private industry in anything (with the possible exception where a health hazard is involved, e.g. smoking) but we have blessed the last 13 years with a government which has absolute certitude that it knows better in every aspect of, well, everything and isn't afraid of implementing it's views.

  12. Steve Cox
    Posted March 24, 2010 at 2:11 pm | Permalink

    "We need an election. Before that nothing sensible is going to be decided."

    How true, and I have been saying the same thing for many months. Our economic well-being is being sacrificed on the alter of puerile party politics. We are cursed that Gordon Clown has been allowed to delay the election to continue ruining us – £6000/second at the last count. That's a clear argument for term limits on a government. If the Conservatives have any time to tinker with the constitution (they will be way too bust clearing up the Clown's mess, I suspect), then let it be this – a four year term limit with no room for playing to political advantage. Our country is surely too precious to let these rogues wreck it like this?

    I wonder if some English bard will soon be refraining Robbie Burns' poem lamenting the collapse of the 'Scottish Empire'?

    "Such a parcel of rogues in a nation."

    That really seems to fit Britain in 2010, especially with 50% of people apparently believing that state spending should be increased…

    Ah yes, such a parcel of rogues in a nation.

  13. Posted March 24, 2010 at 2:55 pm | Permalink

    John,

    I understand that the Banking Regulator is the FSA, in turn run by an ex banker called Adair Turner. (words left out)

    Surely this is the fellow who is (partly?-ed)responsible for the self inflicted disaster, you refer to. Please name him, again and again.

    All the Best

  14. jeff
    Posted March 24, 2010 at 3:42 pm | Permalink

    I think the problem is that of people who find it difficult to access any banking services at all. Even bankrupts and those convicted of fraud, (no not Gordon, no formal conviction as of yet,) need some sort of bank account in today's society. Some employers will only pay wages into a bank account for instance.

    Basic bank accounts fulfill their needs, they will not get a cheque book and cannot go overdrawn, but wages, cheques etc can be paid into the account and direct debits set up. They get a card enabling them to withdraw cash.

    There does not appear to be a downside for the banks here. Other than perhaps these people are likely to be unattractive targets to sales staff, but there is some evidence that Banks often exclude people from even these types of account. Unless people are once again given the right to be paid in cash, it is obvious that some sort of account should be made available to almost everyone.

  15. Tony
    Posted March 24, 2010 at 3:45 pm | Permalink

    Insufficient thought has been given to the difficulty of young people and married women to get banks to open accounts. Typically you will be asked for identity documents which these people will have difficulty in providing. Most utilities bills will be addressed to the male member of the family, some have no driving licence some do not have passports, letters from Tax and Pension departments may only use an initial and not a christian name. Bank accounts may be in joint name or in the husbands name. All of these examples are used by banks and building societies as reasons for doubting a persons identity. They blame the government, the government say such checks are vital to prevent money laundering. Little consolation I'm afraid for the honest investor who yet again is inconvenience and made to pay for the dishonisty of others.

  16. Michael Lewis
    Posted March 24, 2010 at 5:04 pm | Permalink

    "Banks are reining in their credit and balance sheets to comply. If the government wants more private sector expansion, they need to tell the Regulator to back off."

    Completely disagree. Why should the banks be forced to lend? its clearly not in their interests to do so. I'm reminded by the comments of Jim Rogers – the idea that you solve the problem of too much borrowing with more debt is absurd.

    Government plans to force banks to lend, encourage first time buyers into an inflated housing market will only end in disaster.
    I now own next to no Sterling and not even the most contrarian would think its a good bet right now.

    What is worse, the alternative becomes almost as bad as the current government. What on earth was "Dave" thinking with his bank levy. Killing off a key industry with a unilateral tax is just strange behaviour.

  17. Pauper
    Posted March 24, 2010 at 5:24 pm | Permalink

    Now we've had the Budget and the Opposition's reply, may I leave a couple of points for your consideration?

    1. The Opposition would do well to talk not only in billions of pounds, but in so many thousands per household or individual. The arithmetic is simple enough (divide by knock off six noughts and divide by 20 for households, and by 50 for individuals) for a speaker to do in his head, on the hoof. Billions mean little to many of us, but we all understand very well when our personal share of debt, on which we must pay interest, is raised without our permission by £3000 or £5000. This, I submit, should be a general Conservative policy, and used by all spokesmen in all relevant public communications. I believe it would make a case for prudence much easier to argue, as well as being a courtesy to the public.

    2. Future Conservative budgets should contain plain statements of a) national debt per household; b) the date of Tax Freedom Day; c) an expression of sincere thanks to the taxpayers who make it all possible. I have heard upwards of 50 Budgets and mini-Budgets, I suppose, but not one iota of gratitude. Is this not frankly rather insolent?

  18. gac
    Posted March 24, 2010 at 5:38 pm | Permalink

    Watching the (non) budget today got me to thinking that as new labour continues its Unite inspired regeneration as old labour, then England continues to be re-fashioned into New Scotland.

    Worse was the smug expression on Mr Browns face and I became emotional with the hope that he would not be on that side of the dispatch box for much longer.

    Hughes Mearns captured it perfectly in his song based on Antigonish, Nova Scotia –

    Yesterday upon the stair
    I met a man who wasn't there
    He wasn't there again today
    I wish, I wish he'd go away

    etc.

  19. Posted March 24, 2010 at 6:00 pm | Permalink

    If the Government is so enthusiastic, why don't they resurrect the old GPO Giro account, complete with cheque-book. Then they could arrange that it is accessible to everyone who wants it a bank account, possibly at the government's expense.

  20. Javelin
    Posted March 24, 2010 at 7:33 pm | Permalink

    The Government didn't realise economic growth was the result of a strong Inherited private sector then an over supply of credit. They spent freely with tax payers money. Now the economy has falllen away they are still waving their magic wand like the sorcerers apprentice expecting the economy to obey their commands and controls. The disconnect between basic economic is all to clear. You can't spend what you don't have. You can't lend what have don't have.

    Truth is the UK will fall in relative standard of living. Either FX rates, taxes, interest rates or inflation will erode our spending power.

  21. CL
    Posted March 24, 2010 at 7:50 pm | Permalink

    The possibilities for money-laundering are endless!

  22. Max
    Posted March 24, 2010 at 9:37 pm | Permalink

    Looks like a fudge from Darling. The guarantees have been given as gross lending while last year had net lending guarantees. Lending from our state owned banks will be lower in net terms even though the "£96bn" figure sounds big.

    More spin and lies from Labour.

  23. Mark
    Posted March 25, 2010 at 1:04 am | Permalink

    According to the Red Book, Table A1 in Annex A,the benefit of raising SDLT from 4% to 5% on properties worth over £1m is £230m in a full year. That implies that such properties will have a turnover of 100 times as much – or £23bn p.a. even if we assume that the tax has no detrimental effect on turnover. Only 4,105 homes sold for over £1m in 2009. It would appear that the estimate is in fact for the TOTAL yield for properties worth over £1m, not the EXTRA yield generated by the 1% increase in rate.

    Can you use that to get a taxi for Darling?

  24. brian kelly
    Posted March 25, 2010 at 8:29 pm | Permalink

    The budget statement was a shoddy disgrace entirely worthy of this utterly discreditable government. Party political through and through – and the childish, juvenile yet vindictive comments regarding the Belize and Ashton statement was schoolyard politics – and how those stupid, short sighted labour MPs cheered. In the midst of the most serious and disastrous situation this country has ever faced in peacetime they come forward with a totally trivial budget. It is literally beyond belief – and how many times have we had to use that phrase in the lifetime of this NuLabour govt. And Sir! Stuart Bell – the man who worked might and main to prevent the expenses details becoming known to us first of all resisting FoI requests, then saying that total transparent details would be published by some committee or other of the HoC in order to minimise and belittle the Telegraph revelations and which, when published, were hugely redacted, who on every occasion has sought to defend the indefensible the latest of which has been his trivialising of the lobbying scandal and all the time trying to pass himself as a passionate advocate of transparency and honesty – has displayed himself to be an ignorant oaf with his intervention at PMQ's and an illiterate speech during the budget debate in which he seemed to be totally ignorant of economics.
    J. Redwood, your speech was masterful – not a word out of place or wasted. Absolutely excellent as were other interventions and speeches from the conservative benches. [As a side comment you made Bell look ridiculous by comparison]. I have said before how outstanding the conservative benches look in economic debates as against the deplorable front bench of the Labour party. On the labour back benches, too, [when they are there] with some very honourable exceptions.

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