On September 13th 2007 I posted a blog which was very critical of the Chancellor’s important remarks on banking. Mr Darling told us:
“Institutions have in some cases been prepared to lend to people without checking if they were ever going to repay it”
“Institutions themselves need to open their eyes and be more honest”
There needed to be a return to “good old fashioned banking”
This “Moral hazard speech” lasted just one day. Having warned banks there would be no bail out where they had made lending mistakes, the following day he began to go to the aid of Northern Rock.
This week Mr Darling has told the banks they must lend more to small business, or else.
Does that mean they should no longer consider if the businesses can repay it? Does it entail closing their eyes and lending regardless? What if they honestly think the small business concerned cannot get through the recession because it has too little revenue coming in?
Is this a case of different conduct for a nationalised bank from a private sector one? Do private sector banks still have to obey the dictats of the Moral hazard speech, and nationalised ones the requirement to lend regardless? Or has the latest requirement replaced the enthusiasm for good old fashioned banking?
As someone who does want the banks to help small businesses as much as possible, I understand they can only do so on a big enough scale if the government is more successful in offeirng the prospect of recovery from recession. The government faces a dilemma. If it does not start to lift us out of recession, lending too much to people and companies who cannot repay just weakens the banks more rather than saving the businesses we want to save. Weak banks and weak small businesses both need the same thing – more success from the economic policy.