Economic Affairs Committee to review bank lending

 

            The Conservative Economic Affairs Committee intends to take up the issues of falling money supply and difficulty in small and medium sized companies getting loans to expand and to finance their businesses.

             Various commentators assume monetary policy is loose, owing to low official interest rates. The impact of the quantitative easing is now well behind us, and the  devaluation which accompanied it. That policy helped the public sector borrow cheaply, but did not  help many private enterprise companies who still had to pay much higher rates of interest if they could get credit at all. It also intensified the private sector squeeze by lifting the inflation rate.  Now we are back with falling money and inadequate credit.

              Interest rates are no longer doing much for money policy. Official rates are as low as they can go, whilst effective rates for the private sector are considerably higher. This reflects the credit rationing, brought about by bank regulation and the demand for banks to hold a lot more capital for any given volume of lending. Some banks find it easier  to adjust their balance sheets by running down the loan book, than by raising new capital or generating sufficient profit to build up the reserves.

              The Committee intends to raise the issue of bank regulation with the Bank of England and with the FSA.  Counter cyclical regulation should mean demanding much more cash and capital of banks when there is too much credit and money around, as in 2006-7, but being less severe when there is little, as today. The current inflation owes much to weak sterling based on substantial quantitative easing some time ago. Current money policy is far from inflationary, and is one of the constraints on a stronger private sector led recovery.

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24 Comments

  1. David Price
    Posted June 8, 2011 at 1:11 pm | Permalink

    I freely admit to a lack of knowledge about economics on the large scale but I really wonder sometimes if focusing too much at that level misses other opportunities.

    People who want to save can’t or won’t because the bank rates are derisory, yet banks won’t lend and business can’t borrow so stalling the economy. You have argued that banks should be able to release more capital and there should be more competion.

    But why should yet more banks be the only answer for competition?

    At the same time, where people are prepared to take risks for higher returns the government is very quick to penalise, for example the recent action against solar VCTs. At a slightly lower level of risk, but still offering far better returns than the high street banks are credit unions some of which are focused on small business customers.

    Just as an economy which is too reliant on one industry, say finance, is bad isn’t the same true for one mechanism for managing money in the economy? Why should banks be the sole focus, why aren’t the alternatives being actively encouraged and supported in the same way to get money back into the economy?

  2. lifelogic
    Posted June 8, 2011 at 1:25 pm | Permalink

    This along with the huge state, over regulation and over taxation is one of the main thing holding back growth. Probably the main one. When the banks over night back out of agreements and switch lending from up to 80% loan to value at base + .7 to less than 50% LTV
    at Base plus 5% with big fees to (and often forcing repayments too for no good reason) then you force business to stop investing/building/new jobs countless jobs are on hold for this reason not due to any real risk on the loan just banks new rules. RBS/Natwest (government owned) perhaps the worst but all are doing it.

    • lifelogic
      Posted June 8, 2011 at 3:10 pm | Permalink

      Many perfectly creditworthy business, people with perfectly good security, are being forced to borrow on credit cards or similar rates and the like to finish buildings or buy supplies just to keep businesses going. They are all being squeezed by the banks and the government and the 20% VAT and new NI rates into closing down sizing or moving overseas.

    • lifelogic
      Posted June 8, 2011 at 9:09 pm | Permalink

      The banks however do have some very good reasons not to lend to UK businesses. They are over regulation, daft banking regulation, over taxation, daft employment laws, the lack of a sense of direction from Cameron, membership of the EU and the knowledge that SME will have trouble borrowing elsewhere if they do want their money back.

  3. Richard
    Posted June 8, 2011 at 1:30 pm | Permalink

    Companies I talk to, are paying close to 10% for their short term overdraft facility and there are sizeable arrangement fees, admin fees and high service charges added on top, making finance an expensive item in the total costs of a small or medium sized business.

    I have also seen examples of banks suddenly changing the terms of the loan and reducing the credit limit or withdrawing the facility.
    This can cause cash flow problems for a business or even force it into admininstration if alternative loan facilities cannot be found.

    It seems banks would prefer to lend huge sums to Government rather than invest in SME’s
    If the Government wasn’t so hungry for borrowed money then perhaps there would be more of the money supply remaining for businesses.

  4. forthurst
    Posted June 8, 2011 at 2:26 pm | Permalink

    An environment in which banks can make money easily and the rest of the economy struggles seems the wrong way round. The banks are required to lace their balance sheets with government debt thus keeping the cost of government borrowing lower. If the banks were allowed to sell their government bonds, would anyone else wish to buy them? Do we actually have a policiy designed to do no more than prop up the oversized public sector at the expense of the rest of the economy? The economy is failing to grow because the private sector is being starved of funds. How do we get out of this without slashing government spending? Plan ‘A’ is a fraud.

  5. norman
    Posted June 8, 2011 at 2:59 pm | Permalink

    I’d be all for lowering the banks capital requirements (do we still have control over them or is that an EU competence now? Basel I, II, III,…. triggers a memory) but, please, no more printing money.

    If the currently high levels of inflation aren’t caused by current monetary policy they will certainly be raised higher still by firing up the presses for another round of savings / equity theft.

  6. Caterpillar
    Posted June 8, 2011 at 3:19 pm | Permalink

    Well I have no expertise to comment on this, nevertheless my Joe Bloggs lack of understanding would appreciate understanding the following:-

    What could a dynamic reserves model look like? (Obviously low at bust like now, high at boom – but could it be argued for as a way to not hobble banks now?)
    What happened to the £200bn QE?
    Why can banks manage to lend to government?
    Why can banks afford to be lenient on mortgagees?
    Why can Government (tax payer) underwrite student loans irrespective of course or student?
    Do we need a new type of financial institution between savers and small business borrowers?
    What determines the velocity of money? Is there extant literature under different regimes? Let’s see a time series of nominal GDP/M2 and real GDP/M2 (I presume M2, I’m not an economist as you can see above!))
    How is interbank loaning looking?

    Reply Banks can lend to governments because regulators say that is a low risk loan they can put on their balance sheets without penalty. The QE money was spent by the state, who borrowed the money via gilts. Yes the idea of counter cyclical is to avoid too hot and too cold.

    • Stuart Fairney
      Posted June 8, 2011 at 9:32 pm | Permalink

      “Yes the idea of counter cyclical is to avoid too hot and too cold” and the ‘total stability’ we’ve had in the last 40 years shows governments don’t have the slightest idea how to pull this trick off, let alone the wit to consider if it may indeed be their own central bank

    • Caterpillar
      Posted June 9, 2011 at 12:50 am | Permalink

      Thank you for reply.

      So if banks recycle the QE to Govt as loans, and the Govt can lend any student money, but the banks won’t lend to higher risk SMEs … couldn’t the SME’s just be renamed student businesses? OK that is a little tongue in cheek but if Mr Posen gets his way for another £50bn could it be directed differently?

  7. EJT
    Posted June 8, 2011 at 3:30 pm | Permalink

    “The Committee intends to raise the issue of bank regulation with the Bank of England and with the FSA”

    Isn’t this just another competence that has been contracted out, up to the tranzi level – e.g. Basel II ?

  8. Geoff not Hoon
    Posted June 8, 2011 at 3:37 pm | Permalink

    Mr. Redwood, let us hope the review is more fruitful than that of Ofgen into energy profiteering which seems to have been going on for 12 months or more and led to very little thus far. In terms of bank lending, capital ratio’s etc. are we not now in the daft position where bank boards are ‘stuck’ between what Brussels, the Bank of England, George Osborne and the FSA all have to say on the matter but noone actually putting either company or banking regulation into place to require specific action whether new equity, Bond issues or whatever so the whole mess is just drifting along reviewed by all and sundry but nothing actually being done. Sounds just like the public sector to me.

  9. Alison Granger
    Posted June 8, 2011 at 4:47 pm | Permalink

    I run a business and to be honest I’d rather sell my soul to the devil than get a bank loan. Changing terms, exorbitant interest rates, no response to letters or phone requests, sudden demands for repayment. Add that to over regulation and stupid levels of tax and you’ve got a recipe for slow expansion and no new employees. Still if the great and the good want it that way, and they must do, then so be it. Of course if MPs lived in the real world they’d know all this anyway.

  10. Gary
    Posted June 8, 2011 at 5:09 pm | Permalink

    We have just completed a 30 year credit inflation, we are now in the contraction and with BOE rates close to zero and households carrying record amounts of debt, we run the risk of pushing on a string. After all, if stoking growth was as easy as printing money and issuing credit then Zimbabwe would be the richest country on earth.There is no free lunch and there are consequences to credit bubbles.

  11. TomTom
    Posted June 8, 2011 at 6:06 pm | Permalink

    Create an Industrial Credit Bank modelled on Investors In Industry in 1945 and have its equity held by Shell, Diageo, BP and other cash rich companies such as Centrica. Then transfer the SME Loan Book from RBS and Lloyds to this ICB and start a new bank.

    The Zombie Banks can go into run-off which is in effect all they are doing by milking the retail franchise and harvesting credit card customers for easy revenue.

    The country has had 3 years of this bungling on Banks and households cannot take much more pressure before it implodes. We need NEW solutions not this Lemon Socialism of featherbedding deadbeat Zombie Banks at the expense of REAL companies and businesses.

    The Government is criminally complacent

  12. Javelin
    Posted June 8, 2011 at 7:45 pm | Permalink

    I was sat on a desk next to an economist (who played the guitar really well) his job was to decide where to sink the banks funds to get the best returns. Anyway Emerging Markets were deemed to be the best place to get the most profit above the various risk thresholds. The decision was made on a big spreadsheet including SME bankruptcy, tax, debt and volatility and SME growth rates across various sectors in the various countries. It was a very important piece of work because the bank shareholders and depositors money was at risk. I had a lot of respect for the economists thoroughness and desire to be as objective as possible.

    Anyway, the historical data clearly showed increased profitability in emerging markets relative to the UK. Corporate debt levels and tax in the UK were a particular weak point.

    The but I haven’t mentioned is the size of the deposits. Low interest rates mean lower savings rates and less money. Banks try to keep savings in the countries they were deposited, but there is no law to ensure that.

    If St Vince wants more money lent to UK companies he needs to increase savings and make UK companies more profitable and less risky.

    • Conrad Jones (Cheam)
      Posted June 9, 2011 at 5:24 pm | Permalink

      The Bank of England could create the money – debt free then lend it to businesses directly for 0% interest.

      This seems to be the only way to get money to businesses.

      Strange really – when Banks get money – it seems to disappear and then re-appear in Rio.

  13. Bazman
    Posted June 8, 2011 at 8:07 pm | Permalink

    Why should they lend money when they can make more by doing nothing with no risk? The privatising of profit and the socialising of loss has not gone away. The market was allowed to run riot and any talk of regulation was opposed by most people. Anyone who spoke out against this fantasy was sacked. This idea of letting big business and rich individuals do what they like and the wealth will trickle down is for the birds. Most left it in the bank who then gambled on property and fantasy mathematics. Not industry and the long term future of anyone but their own fortunes. Why think the same people have changed? The buying power of the average worker is lower than 30 years ago that is if they even have a job. The wealth of the middle classes has gone up by half and the top people three and half times. All this despite tax credits and a minimum wage the tax credit cuts and tax rises are now adding further to personal debt and reducing the money put into the economy. Reducing the pay and working conditions at the bottom is not an option and neither is tax cuts for the rich. With interest rates so low you could argue it is a good time to borrow and spend money. Personally I have paid off all my debts and are coming out fighting as I said I would during the last Tory recession. Tougher employment laws? Bring it.

    • Simon
      Posted June 9, 2011 at 8:32 am | Permalink

      Bazman ,

      I am sympathetic to your views that leopards will not change their spots and share your anger for the banks .

      Please put your emotions aside for one minute and tell me what you honestly think tougher employment laws would achieve in practice ?

      All I can see is they would make it harder for companies to take on new employees .

      You can’t protect jobs unless they are created in the first place .

      I know 3 sole traders and small businesses who would love to take someone on and do their bit for employment but will not because it is such a minefield .

      With the equality laws you can’t even ask an interviewee “how they are today” as that leaves you open to claims of discrimination on health grounds . Small companies are hiring solicitors to sit in job interviews .

      One small business I know has already been held to ransom by an employee who was out to get them from the start and roped in win-no-fee help . This is not that uncommon .

      The only real type of job security is being able to get another source of income when one finishes . Employment laws are not worth a damn compared with this .

      I speak as someone who has been made redundant 3 times in 23 years of work .

      The sort of companies I was working for were transient things making the most of transient opportunities (software houses) .

      I remember that over a 6 month period they shed 75% of the workforce ,(50% of the workforce twice) . It ensured the remaining 25% got 2 years more work . We were already on reduced pay before this and accepted it in an effort to preserve jobs .

      • Bazman
        Posted June 9, 2011 at 9:13 pm | Permalink

        You misread my last comment. I meant I did not care about legislation making it more difficult to take industrial action as I am in a position to just will not work for a bad low paying company.
        It is not your business to preserve jobs this is what the management are paid for. Nor is it your business to subsidise the company by taking a pay cut. If you put forward the argument that the company was raking it in and you deserved a pay rise you would be shown the door. This is often a scam to cut the workforce and drop the pay, though in your case I could not say.
        There is some merit in what you say about sole traders taking on one employee for a short time though. Many just take on casual workers on the black economy. How do the middle classes think you live without money? I’ll tell you how it is in many towns. The family claim benefits and the wife works in a legitimate job as a cleaner say. The husband does casual work for about a ten to twenty quid a day fixing cars, garden labour etc for someone with a job who cannot afford a real tradesman. If he is a good boy gives some to his wife. The rest goes towards a pint at the weekend.
        Benefit cheat robbing the taxpayer, laughing at people who have real jobs and needing the full force of the law? Or desperate person put in this position by a society that cannot employ him?

  14. Conrad Jones (Cheam)
    Posted June 8, 2011 at 8:59 pm | Permalink

    From a Book I’ve been reading there was an interesting point made about the Great Depression of the thirties:

    How is it that in September 1929 – there were enough resources, enough people to work and enough money – but by October 1929 – there were -apparently – no longer enough resources and people were about to lose their jobs?

    The reason for the Great Depression was not a lack of resources or a sudden lack of skilled workers – the money supply suddenly evaporated through lack of confidence – the very thing the Federal Reserve System was created to protect everybody against.

    The point is that it was the Financial sector that took away the common means by which we all exchange our goods and services. The money supply was being inflated through the 1920s to help pay for the War debts of World War I. The roaring Twenties was a fake Boom created through money supply manipulation.

    Isn’t it ironic that the very people who manage our money supply and so obvioously proved how incompetent they are at doing that – were the ones to be helped by the Government first. Their money creating abilities have not been taken away, they are still gambling on commodity markets while the News Media blames the price of Oil and bad weather on Crop Harvests for the rise in inflation.

    “The new money could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.[42”

    http://en.wikipedia.org/wiki/Quantitative_easing

    Give us a Positive Money supply and you will have a Positive Economy.

  15. sm
    Posted June 8, 2011 at 11:32 pm | Permalink

    All good – stabilizing the money supply at a level conducive to economic growth preventing rapid inflation/deflation of money bubbles.

    Insist all banking is visible and fully transparent.

    Clean the stables and transition.

    Normalise interest rates slowly to actual rates over several months then raise capital requirements past squeaking point closer to 100%, so creation of credit is a government function.

    Setup industrial/mutual banks to target SME business with publicly created money to offset capital destroyed in large banks as and when rates normalize.
    These defined purpose banks can be directed to productive investment and new construction loans which favour for example new build or major rennovation. New dams/hydro/sea power/gas oil food strategic storage etc

    I would think that certain assets need to fall in price relative to earnings, the state should allow creative destruction in banking, restore moral hazard (retrospectively if material to state finances or in overwhelming public interest), restrict monopolies and allow obvious bubbles to deflate.

    Lets have some serious substantive binding referenda. Free us from the EU and the politics of ‘DC’ saying one thing and doing another?.

    The big problem now being prices of things needed is increasing and jobs security/wages falling, mass immigration is still a problem, along with massive trade imbalances with the East.

    If we avoid problems long enough we may be forced to deal with them all at the same time at a time and place not of our choosing.

  16. adam
    Posted June 9, 2011 at 2:03 am | Permalink

    what i dont understand is why the banks monopolise the currency
    why do they get money first before anyone else.
    The government should just issue the new money as welfare, banks should be restricted to making loans with real money.
    Why do we need the banks to make loans at all. Why are they involved in mortgages. Maybe the seller should create the money out of thin air against the collateral of the house they are selling and loan it to the buyer

    • Bazman
      Posted June 9, 2011 at 9:18 pm | Permalink

      Watch the Keiser Report on Russia today funny and interesting look at the scandal behind the financial headlines.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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