Time to do more about the collapse of UK private sector credit and money

In October 2007 the borrowing binge peaked. That month lending to small and medium sized UK companies grew by a heady 33.5%. UK business took out an additional £17.4 billion of loans in just one month. In July of that year banks’ syndicated gross loans less maturities peaked at £23.9 billion in the month.

Labour’s boom bust monetary policy then created the opposite horror. By July 2009 bank lending to small and medium sized companies was contracting at a rate of 14.8%. Over the year to May 2010 bank lending to business fell by £46 billion, whilst syndicated gross loans from banks fell by £51 billion. Between January 2009 and May 2010, loans to UK business contracted by £60 billion.

The result is a private sector cut back substantially, and now much less in debt than before. If we want a decent private sector led recovery – and that seems to be the consensus wish- we need some sensible growth of business credit. In April bank lending to SMEs was still falling. Overall lending to business is still contracting. There is no great banking or market enthusiaism to raise the large sums needed for private infrastructure and the growth projects we need.

The government is going to have to change the banks, by working on the ones it owns, and changing the regulatory message to the rest. More prudence was needed after the excesses of 2007. In today’s climate, when banks have better balance sheets and business is less geared, it’s time for a change of tack to get that recovery we all want.


  1. waramess
    July 21, 2010

    OMG and I thought this was a right wing blog. Why not just leave the banks alone. If you force them to lend they will make bad loans and that will hit their capital base. That will mean their still wobbly capital ratios will become even more wobbly.

    Politicians have an irrational fear of recession. They think every recession will turn into a depression which is untrue. Politicians have no fear of inflation which they believe they can control which is equally irrational.

    Just leave the economy to settle down of its own accord. First reduce corporation tax by significantly more than currently proposed and then reduce income tax.

    Yup, you will have to cut the size of government, and pretty damned quick, rather than just talk about it but it is the only way to stimulate the economy in a sustainable way.

    We need a recession because the only alternative is to reflate the bubble and the reason the bubble burst in the first place was because it was not sustainable.

      July 21, 2010

      Well put – sadly to much intervention suggested

  2. Nick
    July 21, 2010

    Your analysis is correct, but your conclusion wrong.

    Banks have still not got back to the pre crash levels of capital, that in hindsight were inadaquate. They still have some way to go to get to a safe level.

    Your taxation of banks isn't helping. By deciding that you need to punish all bankers for the sins of a few and the massive cock ups of the regulator (Gordon Brown), you are preventing them from getting to a situation where normal lending can resume.

    That leaves the only thing that you can do as a poltiician, which is to cut. For example, the FSA (food not finance). It's to be got rid of. Good. It's functions are to go to other department such as Defra. So, no change there, carry on spending.

  3. Alan Jutson
    July 21, 2010

    Business sectionTelegraph this morning.

    Britains Banks face £390 billion funding Crunch next year, as they need to refinance maturing bonds and closure of Government funding schemes.

    Perhaps this is why they are not lending, They are simply just increasing their reserves with the cash that they are gaining from the massive margins they are now making between the rates they are paying out to depositors, and interest they charge from borrowers.

    All the while depositors have money in the Banks it looks like they will be screwed for some time yet.

    Its the savers who are paying the price for refinancing the Banks.

    If you pay tax you are paying again.

    If Your Company needs finance you pay again.

    The least the Government could do would be to allow all savings interest to be tax free.

      July 21, 2010

      quite agree – as ever the prudent, self sufficient are being punished for the sins of the profligate

  4. Nick
    July 21, 2010


    Is another reason why it's not going to happen. They are in serious competition with the Government when it comes to funds.

  5. oldtimer
    July 21, 2010

    Not only is there the squeeze on bank credit, this coalition government has also, by its income tax and CGT policies, put a squeeze on the ability of businesses to raise new risk capital from private investors. And when major international institutions like JP Morgan question the reasons to invest in the UK and the benefits of relocation elsewhere, then it is obvious the writing is on the wall. Do not hold your breath waiting for a private sector led recovery.

  6. Tony_E
    July 21, 2010

    The government will be uncomforatble to be seen to be interfering in the running of the banks so directly as to push this policy. Their priority has been to let the banks (even the ones we hold large proportions of), run as profitably and independently as possible so that they can be returned to the private sector as soon as possible.

    Secondly, government has had different priorities. Mortgage lending appears to be a more pressing political issue because as it has slowed, then house prices have begun to slip and the fear is that we might have a return to the situation of 20 years ago where many people were trapped in negative equity. For the banks to lend freely to both markets could undermine balance sheets.

    Politically, avoiding reposessions seems to be the priority as it presents an open goal for Labour. More balance and long term strategy is required.

    1. Mark
      July 21, 2010

      Grant Shapps unearthed the truth about repossessions: Labour's policies had led to a bubble that would cause 175,000 repossessions a year by 2012. Those repossessions are still mostly going to happen: they have merely been deferred by Brown's re-inflation ahead of the election at the risk of making the problem even worse.

      House prices and mortgage books have to be sorted out. Only when the bubble has unwound can property be regarded as adequate security for anything more than a 50% loan. When it is clear that the bubble has unwound banks will be able to offer umbrellas to everyone who wants them. The profit priority is really to give the banks the capital to write down the losses they will incur on their property lending. The sooner that is done, the sooner we will have a real recovery.

      It may seem tough for those who overpaid for property and overborrowed against it, but there really is no reason why they should be shielded from consequences of their bad decisions and bailed out by the rest of us. Now that's something I would have thought the Labour party could really make some capital out of (if it wasn't for the fact that they are past masters at capital destruction).

      1. The Squeeze
        July 22, 2010

        I have my suspicions they will pull the plug on the over-borrowed once the banks can take it too.

  7. Michael Read
    July 21, 2010

    Could be so. Could be not.

    No one could tell one way or the other on the basis of your selective figures.

    Why not the absolute numbers? And if they show a decline, as they probably do, then given the downturn that might be expected if not a miracle if the downturn was on the sharp side.

  8. Steve S
    July 21, 2010

    To put it bluntly we are in a pickle with no way out, other than to raise interest rates now – not by a massive amount, but to signifiy that the current rate is unsustainable. The Bank of England need to do this now. It is difficult given the very fragile "recovery" and will be hard for those stuck on variable rate mortgages and in negative equity, but something must be done for the good of the savers if the banks aren't going to start lending more now.

      July 21, 2010

      on the money

  9. nonny mouse
    July 21, 2010

    When I last looked at the quarterly figures (I think they were from the ONS web site) the banks were lending money for housing but the business sector was paying back loans rather than taking out new ones.

    This is worrying because house prices are still too high when measured as a price to income ratio and will probably fall in the medium term. It is also starving businesses of the cash they need to grow and create jobs.

    I understand the desire to keep interest rates low during the cuts to cushion the blow to the economy, but this risks feeding a new housing price bubble. Also, low interest rates are not helping businesses to borrow.

    I would propose two policies to modify the bank lending pattern over the near term (i.e. until the deficit is cut in 2014-15).

    1. nonny mouse
      July 21, 2010

      The first would be some sort of regulation to make house lending less appealing to banks. One possibility would be increasing the deposit needed to buy a house or a limit on the total value of mortgages. Another would be to require banks hold extra capital against new mortgage lending. As a believer in the free market my instincts are against this sort of regulation, but I think that the unwinding of the banking crisis and public sector deficit has created special circumstances. I would time limit such regulations and review them quarterly based on house price changes and economic growth, so if the economy tanks they could be removed quickly

      The second would be introducing an insurance scheme for business lending. This would be paid for by a small levy on all business lending. It could be targeted on small and medium enterprises which are the riskiest and find it hardest to get loans. The insurance would pay back a proportion of any bank loses should a business fail and be unable to repay a loan. In the short term the government might need to take on extra potential liabilities, but the goal would be for the insurance scheme to grow a fund over time to cover them.

  10. EJT
    July 21, 2010

    Congratulations to Mr. Redwood on his election to chair the backbench committe.

    Trite in comparison with the considered replies above, I know, but the government's priority must be to put its own finances in order.

      July 21, 2010

      we must try and contriol what we van control – simply expenditure – tax revenue is volatile variable

  11. forthurst
    July 21, 2010

    is it acceptable for a financial institution whose major activity or even any activty at all is not loans and deposits to call itself a bank even if under some jurisdictions it may so denominate itself and thereby qualify for large dollops of taxpayers' cash?

    Is it acceptable that financial institutions should be allowed to continue those activities which were partially or significantly responsible for massive increases in taxpayers' indebtedness and the global recession?

    Is it acceptable that financial institutions should be permitted to operate in commodity markets when they themselves are neither producers nor consumers thereby inflating the costs to the consumer of essential produce?

    Is there any reason at all that financial institutions should be allowed to engage in activities which do not demonstrably provide a public benefit? Otherwise surely they are parasites or worse?

    Leading up to the global recession, the regulators had demonstrated a woeful lack of competance or relevance while the banks explored whole new horizons for squandering depositors' and shareholders' funds whilst payiing themselves inordinate commissions and bonuses for their self-assessed brilliance. The regulators, the depositors and the shareholders need to know what the banks are up to.

    The banks cannot be allowed to destroy the capitalist system, which has created the modern world, such that wealth producing activity declines and such wealth that remains finishes up in the back pockets of spivs. Socialism doesn't work; capitalism must be made to work.

    1. Mark
      July 21, 2010

      I see you'd like to keep your boot on the throat of (a named Investment Bank)!

  12. Lola
    July 21, 2010

    ".,..If we want a decent private sector led recovery …" – Erm? What other kind can there possibly be? A 'governemnt led recovery' is the enduring fiction of various lefty politicians and economists. The over-bloated State sector and spending on pork barrell or vanity projects just do not create sustainable wealth creation and they do it by taking money away from current and future private sector wealth creators.

  13. Javelin
    July 21, 2010

    You're absolutely right to highlight the funding problems for SMEs. Banks also have a funding problem of their own. Special liquidity schemes put in place by Gordon Brown mean that banks need to refund up to half of all mortgage borrowing from a low rate he offered thru the BofE over the next few years. Borrowing is tough for SMEs, but will be tough for mortgage holders and Low quality new mortgage holders for years to come.

    Ive said on this blog before that it's very easy to go into a recession but the biggest danger is when you come out if a recession. In 1991 it was the danger of high interest from the BofE keeping inflation down. Today the danger is high interest rates from a lack of funds to borrow.

    Whilst this is an inverted recovery, in terms of UK inflation and sluggish growth – it will be a normal recovery for the BRIC countries who will steal our high risk jobs because banks will avoid funding them.

  14. @GrahamEardley
    July 21, 2010

    So how long will it be before the condem coalition introduce a Glass-Steagall Act in the UK ? and how would such regulation help the City.

    It's bad enough that we have the Committee of European Banking Supervisors forcing Banks to undergo the stress tests at the moment and publishing the results in a difficult market.
    We will also have the new European Bank Regulator based in London on top of our own regulations we have to get the balance right and I think that we are in a real danger of overreacting and must ensure that any new regulation in noway stifles the cities competitiveness.

    We must remember four of the world's top 10 banks by market value are based in China where no such Glass-Steagall legislation has been suggested and that it has been muted that HSBC will move to Hong Kong to avoid splitting the bank

  15. Demetrius
    July 21, 2010

    Many banks are rusting hulks with burned out engines but still consuming vast amounts of resources. They really should be scuttled.

  16. Antisthenes
    July 21, 2010

    Charge of the Light Brigade tactics Mr Redwood. No the die is cast the market is correcting the imbalance in debt and risk and government interference in a market will do more harm than good. 13 years of Labour has caused the illness by this very type of interference so now the cure. The illness will be long and painful and there will be relapses but eventually the medicine will work and the patient will pull through. Dilute the medicine and the illness will become terminal.

    1. waramess
      July 21, 2010

      Your analysis of the cause is without doubt. However, with the government spending 53 percent of GDP the answer is not to wait and do nothing. This state of affairs is not sustainable and the market will not be able to adjust whilst this situation prevails.

      Cutting government and taxes is the only answer, not just talking about it as the coalition seems to be doing

    2. Steve Tierney
      July 22, 2010

      Im with Antisthenes, John, on this one. Sorry.

    July 21, 2010

    well put!

  18. Iain Gill
    July 21, 2010

    much of the downturn was caused by overpriced houses in the USA, loans on houses which were not sustainable, compounded by many home loans being divided up into complex products which were then sold onto investors as a much lower risk than the reality of the underlying loans

    So yes John your analysis is partly correct BUT we in the UK still have massively overpriced houses, we still have state and banking sector subsidy of mortgage holders to the great expense of savers and until and unless these are addressed then business loans are going to be limited

    You see there are no real levers which would allow easier borrowing for real investment which wouldnt blow air into the housing bubble which should be allowed to deflate (yes there will be some casualties but this is better than the alternative)

    Much of the loans made by the banking sector are only really funding more outsourcing to 3rd countries and so on, they may make profits on paper but they are sucking earnings out of the UK economy

    You need a more joined up story that includes housing, that includes international outsourcing, that includes savers having a fair deal, and so on

    Much as I love you you need a rounder story

    1. nonny mouse
      July 22, 2010

      I predict that what will happen is the politicians will take the easy way out and allow house prices to boom in order to create growth in the wider economy. This is how they would gain popularity so that they can get reelected. This strategy will come and bite us in the ass in 5-10 years with a huge house price crash.

      >>You see there are no real levers which would allow easier borrowing for real investment which wouldnt blow air into the housing bubble which should be allowed to deflate

      Now is the time to think outside the box as the rules have changed. I suggested some policies for doing this in my earlier comments. Now I'm not suggesting that my ideas are practical or even good for the economy, but I would love to see others putting ideas on the table.

  19. Paul B
    July 21, 2010

    Are we still trying to solve a debt crisis with more debt?

  20. nonny mouse
    July 22, 2010

    Can we quantify the house price deflation needed to bring the market back to historic norms?

    Lets say for the sake of argument that the long term average is 3.5 times average earnings and average earnings are 24000, that would mean average house prices should be 84,000. Right now they are somewhere north of 100,000, so lets pick 100K as the current price and 84K what they should be, so they need to fall 16K. If there were 10 million UK private residences then the implied fall in house price capital would be 160 billion.

    We want to bring house prices down over a long period, say 10 years, rather than the market crashing. That would imply a reduction in capital of 16 billion a year. This is capital owned by private individuals who would not be very happy with that happening. The capital is used as equity against mortgages which makes the long term position of the banks worse than currently admitted.

    Now my numbers are completely wrong, but you get the idea.

  21. christina sarginson
    July 22, 2010

    Thanks for the information John, I look forward to seeing the result of the government working with the banks to improve lending to SME's, my business currently banks with RBS who supply customers with an awful lot of red tape before lending this puts businesses off, amybe that is the point of it

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