Banks and growth


                   Money has been easy for the UK public sector. The 0.5% interest rate is the one that applies only to government. Government has enjoyed using it to the full, borrowing collosal sums on the back of it.

                  Money has been much tighter in the non bank  private sector. Effective interest rates for borrowers have been 5% or more, more than ten times base rate. Savers have suffered from the low official rates, but even they now enjoy a multiple of 0.5% for savings plans of 1 – 5 years.

                 The main reason money is still so tight for the private sector is the Regulator’s demands that the commercial banks continue to strengthen their balance sheets. The large  profits the banks can make out of low official rates for themselves and the government, and the much higher lending rates, helps. Their super profits are the result of the favourable monetary conditions fopr banks, designed to boost their retained profits and so their balance sheets.  It still leaves a lot more to do. That encourages the banks to lend less or to limit the growth in their lending. It is easier to lend less to improve their ratio between the amount of capital and the amount they lend, than to raise new capital.

                 Because lending is effectively rationed by regulatory orders, it is easier for the banks to lend more money to large companies, low risk individuals and corporates, and the government itself, than to lend to riskier and smaller ventures. The large loan books in London for the corporates and the financial sector are easier to administer than the large numbers of small loans in provincial UK.

              This is the essential background to the budget. Getting the banks right is far more important than the small government  schemes Ministers like to dream up for particular areas, sectors or themes. A few hundred million for Enterprise Zones, and a couple of billion for a Green Investment bank are small in relation to a £1.5 trillion economy.

              The danger now is that growth could start to slow later this year or into next. Emerging market economies are being forced to slow down to curb inflation. The US monetary stimulus expires in June. Euroland is struggling  to grow outside Germany and is already talking of monetary tightening. The oil price hike will reduce demand around the world as energy takes a higher proportion of the consumer economy incomes. If oil prices stay high because oil production is cut, all are losers.

            The government is waiting for the Vickers Report into the banks. Much is now riding on that piece of work, and on the government’s response to it. Only by mobilising the banks for sensible levels of money and credit to go into the private sector can the economy hope to make faster progress. Meanwhile, it would be good if the government got on with making a major building programme in the energy sector possible, as we are going to need  more domestic enegry soon.


  1. Mick Anderson
    March 13, 2011

    Only by mobilising the banks for sensible levels of money and credit to go into the private sector can the economy hope to make faster progress

    Not entirely true, Mr Redwood. There is still the option of shrinking Government, reducing spending and taxes, thus causing less drag on the economy. If they left us more of what we earnt, it would be there for spending and investment.

    Also, as a saver, I’m not sure that the existing rates are there to be enjoyed. They are still pitiful if you need your investments to give regular income, rather than a small lump sum after three to five years.

    1. Ralph Musgrave
      March 14, 2011

      I quite agree with Mick Anderson, at least in that I also object to the sentence of JR’s quoted by Mick Anders.

      Contrary to JR’s claim, governments can easily feed new money to the Main Streets of this world rather than to the Wall Street based banksters of this world. However banksters control politicians: banksters fund much of US politicians’ election expenses. In the UK the control is more subtle, but still there. In other words improved economic growth can easily come without any “mobilisation” of banks.

      Bank assets and liabilities have expanded about ten fold relative to GDP over the last twenty years or so, and with no visible benefit in terms of improved economic growth.

  2. Dr Alf Oldman
    March 13, 2011

    Whilst I broadly agree with this article, the word “oligopoly” comes to mind when thinking about the UK banks.

    Whichever way one looks at the situation, there seems to be a pressing need for reform, greater competition, great accountability and customer orientation.

  3. lifelogic
    March 13, 2011

    It is far worse than 5% I know of good borrowers with good property as security who cannot borrow at 10%. Anything above 50% LTV and development loans are hard to find. Second charge lending is virtually unavailable anywhere. Also the banks are trying to claw back old loans and insisting on rapid repayments and high fees in and out. It is hugely damaging and and reduced jobs and investment hugely particularly in construction. It has little to do with risk these are often solid borrowers with good security. Approvals are very slow too even if they come and virtually all the banks are the same.

  4. Euan
    March 13, 2011

    All very well having a major building programme in the energy sector but what exactly are you going to build. Every single form of fossil fuel is either at or near peak production and likely to soar in price as is nuclear. That leaves wind and solar, both of which are far better done at individual or local levels. In the meantime we are being saddled with the high speed train white elephant and absolutely no real cuts in the deficit. So we have soaring energy costs (food as well), soaring debt and ineffective leadership. Great combination if you invest in precious metals and commodities but not so good for anyone else.

  5. John Ward
    March 13, 2011

    I think you’ll find that the regulators’ insistence on repairing balance sheets was , um, embedded in the proposals at the insistence of the banks who needed their balance sheets repairing.

  6. Brian Curnow
    March 13, 2011

    The Full OTS report is also eagerly awaited especially in the Small Business community that I’m familiar with.

    The OTS Committee are presenting us with alternatives. Personally I favour the early elimination of NICs which will also eliminate much of the original justification for IR35.

    John Whiting and Jacks have a tiger by the tail. It will be interesting to hear how all this plays out in the Budget.

    Best wishes
    Brian Curnow

  7. Tim Robson
    March 13, 2011

    And you’re not in the Cabinet, why John ?

    1. Electro-Kevin
      March 13, 2011

      ’cause he’s a real politician ?

      1. lifelogic
        March 13, 2011

        Alas real politicians very rarely suggest solution that would clearly work as JR nearly always does.

        They tend in general to play a game of exploiting people fears, basic envy, fear of discrimination and unfairness and other emotions in order to get elected.

        Then, when in power, they generally do things that damage the economy, increase the size of the state and often do their best to enrich themselves and their friends in the process.

        As an example they do not care in green PV panels and wind farm “green” house “Bling” actually works – they clearly must know they do not. They simply care if voters, with no engineering knowledge , think they are a good thing and might vote for them as a result of their parties supportive words.

      2. Electro-Kevin
        March 13, 2011

        I should add that David Cameron is Europhile despite his claims to be other.

        Mr Redwood does not fit in with this agenda and never will. The Tory party cannot be changed from within as some think.

    2. Alfred T Mahan
      March 13, 2011

      Because of the political version of Gresham’s Law – bad politicians drive out good.

  8. Andrew Gately
    March 13, 2011

    Unfortunately yet again you are correct in your analysis and understanding of the action that is required but will be drowned out by the usual band of bank bashers.

    To be honest if the budget is just going to be a few micro economic measures that are designed for the next days headlines rather than creating a more favourable enviroment for small business then it would be better if they did nothing at all.

    1. zorro
      March 13, 2011

      …drowned out by the bankers actually….The present ‘model’ is perfect for them – free money to lend at usurious interest rates on a fraction al reserve basis – all with the aim, of course, of rebuilding their balances so that they can grant bonuses ad infinitum.

      This isn’t about free market capitalist economics. We live under institutionalised socialism or more correctly corporatism. Everything is run for the corporates benefit. Profits stay with the banks and losses are socialised….Simples!….Why should our bankrupt banks who run the politicians want to change this scenario?

      They are able to trade in made up money, make a profit and laugh at the economy.


  9. rodneydawkins
    March 13, 2011

    5% borrowing rate? I have a loan from majority-state-owned bank RBS at 10%. And they have refused to renegotiate.

    I pay £290 / month and they take back £120, in interest.

    Because of this usuary, I will be intensely annoyed when the bank is eventually returned back to private ownership – if political capital is made over any ‘return on the investment’ by the Left.

    1. lifelogic
      March 13, 2011

      Fine an RBS or bank depositor being paid perhaps .3% and borrow directly – cut out the rip off middle man. For a business you might even get some tax relief too if structured well.

      The banks are currently a rip off and have no real competition.

  10. A.Sedgwick
    March 13, 2011

    Good piece, picking up on your reference to Enterprise Zones, whilst every little helps as the phrase goes I am not enthusiastic. For me they are more rules, regulation and big government. Let us have a national business and jobs friendly regime and let companies work out which areas offer the most. In order to achieve this a revolution in government thinking is needed to encompass e.g. the ditching of VAT and current local authority taxes for a self financing sales tax and big ticket cuts e.g. overseas aid, EU, Afghanistan and more.

    1. lifelogic
      March 13, 2011

      I agree their is little sense in making one area have tax benefits like enterprise zones.

      It just produces contrived arrangements and businesses in the wrong places.

      It needs to be helpful everywhere.

  11. Javelin
    March 13, 2011

    I can’t cut and paste into this text box, but search google for “the bank of englands biggest worry higher wages”. In this article in moneyweek you can see a graph showing RPI, interest rates and wage inflation.

    The graph shows interest rates follows wage inflation much more closely than price inflation. Wage inflation is now rising, but interest rates are not.

    I would urge any reader to look at this graph.

    This graph also begs the question that if interest rates and wage rates follow such a VERY tight correlation why do we need the BOfE MPC at all. I always assumed that there was an 18 month lag between interest rates and wages. There is no such thing. The Government could quite easily have set a 3 month review and set rates themselves.

    Further more it begs the question if interest rates and wages follow such a close relation then what is it that the MPC doesn’t do. Which I can only answer as outside their remit.

    This graph is the MOST damning evidence that I have seen regarding the MPC. It makes them pointless.

  12. Bill
    March 13, 2011

    Biggest disappointment to me, how this government has handled availability of bank lending.
    No one wants to go back to reckless lending, but I have clients that have had facilities with banks of many years standing, now being asked for addition covenants, interest cover ratio and PG’s.

    This on a reduced loan to value ratio.

    If bankers really are just lending a little on solid assets – money lender function – is there a need to pay any of them more than £30,000/year?

  13. sm
    March 13, 2011

    1) Restore transparency,proper regulation,competition and capitalism to banking.

    Banks are scared of lending because of future potential losses when interest rates rise? which will be the case until they do rise? in tandem with persistent inflation as a consequence of ZIRP (we are not Japan.) Interest rates should have been raised this would have squeezed the bank bonuses lower and got us closer to normal rates.

    2) Rebalance the economy to non bank, non state activities.
    3) Stop spending on non critical activites, EU, which will not reduce our imports.
    4) We need new nuclear plant, preferably Thorium (google China and Thorium reactors or similar). A Severn barrage or similar spend.
    5) Reduce taxes on employment.Subsidise UK apprenticeships in shortage skills areas.Further reduce immigration to UK until we get growth and review.
    6) Seriously consider positive money to do or QE to do 4). Steadily move to system where private banks cannot create money, but compete for it and facilitate its efficient use.

    How many ex politicians find gainful employment in banking and other quangos and vice versa. So this will never fly.


  14. Mike Stallard
    March 13, 2011

    As an ordinary punter, I simply cannot be expected to oversee the bank where my money is placed. So telling me to accept risk is ridiculous.
    The government is not good at banking. It just blindly regulates, refuses and shuns risks and dreads losing votes with a run on the bank.
    As we have seen, the bankers cannot be trusted to run themselves: they risk and gamble and then expect us, the taxpayer, to bail them out and cancel their recklessness.
    Before Gordon Brown interfered, the system seemed to be working perfectly well when the Bank of England had a quiet word. Couldn’t we go back to that? Does the Chancellor/President of France really have to be part of the big picture?

  15. Phil Taylor
    March 13, 2011


    I would be interested to hear your views on how we could create a new breed of banks that focussed on their local geographies and re-circulated local savers’ deposits into lending for SMEs. Higher returns for savers, lower rates for borrowers and small, fleet-footed, local institutions in the middle with little bricks and mortar maybe with some online matching of savers’ with borrowers’ maturities.

    I have been asked if local authorities should play a role. I think not but I would like to hear your views.

  16. Alan Wheatley
    March 13, 2011

    The government are emphasising the business and social benefits of the internet, and increasingly using it to reduce their own cost, and encouraging everyone to do the same irrespective of whether they have good access or not. They want to see widespread take-up to high-speed broadband, and are continuing with Broadband Delivery UK, the quango created by the previous government, to roll it out across the country. But at the same time they are not backing the venture with the money they know will be necessary to achieve the objectives and deliver the benefits.

    If ever there was a case for investing in UK infrastructure this is it, and now is the time to be doing it. Firstly there is the jobs that will be created building the new facilities, and this will be across the whole of the UK, not just along the London-Birmingham corridor. Secondly will come the benefits the government say are there to be had. And thirdly this is an activity that will be beneficial for the environment as instead of encouraging more travel an effective alternative will be available to reduce travel.

    I now see there is evidence (see TPA web site) that HS2 will increase the journey times for many existing rail journeys, which is another nail in the coffin of this vain folly. This government should be spending what money it has on technologies of the future, not wasting it looking backwards.

  17. BobE
    March 13, 2011

    Did you notice the weak applause at the Lib Dems conference. They know that they will be destroyed at the next election, but don’t know what to do about it.
    Come on Alarm Clock Britain ( Nobody cheared, they just sound muted and depressed). In four years time the Lib Dems will poll a tiny amount. Their supporters will switch, mostly, to labour and another 12 years will begin.

  18. Gary
    March 13, 2011

    You refuse to question or even broach the premise of fractional reserve banking. Instead , even as a self proclaimed free marketer, you persist in trying to regulate this sow’s ear into a silk purse. Why is that ?

  19. Iain Gill
    March 13, 2011

    I hate to bang on about other stuff

    But stuff like proper payment for use of UK intellectual property should be getting similar high level political attention, if we were getting paid for all the IP of ours in use in India, China and elsewhere it would make immediate significant impact to our balance of payments

    Stuff like the use of tax havens by companies earning wealth in the UK moving money out of our economy

    Stuff like work visa holders essentially being subsidised by UK tax payers which is far from how the rest of the world operates, and the out of control issue of ICT visas destroying some of our real wealth creating sector

    Banks is just a small part of the equation

    1. zorro
      March 13, 2011

      Carry on – you are right on ICT – not included in the cap. What a nonsense!


  20. zorro
    March 13, 2011

    Kill the monster banks, as ‘Old Hickory’ might have said – they are, of course, run for their own benefit – they are monopolies. They are not supporting the British economy, all they are doing is looting the wealth of others and the government is facilitating this looting with its heavy taxes on ordinary people.

    A lot of us have mentioned that the government is being duplicitous in its messages about inflation and growth. Because of their weakness, they are relying on ZIRP, QE, heavy taxes, inflation and slight decreases in the rate of increase in public spending. There are very few pro business initiatives, and the ‘cuts’ they are imposing are focusing on the wrong areas i.e. not on the massive consumers of public funds, benefits and NHS.


  21. Bazman
    March 14, 2011

    I’m debt free so the banks can ram it. I’m glad to say that I paid only a little interest on a mortgage to a small local building society and no ‘fee’s’ for banking in the last 20 years.
    Lloyds TSB pays 4% on deposits of 5-7 grand. Use them like they use you except if you are an apologist for them, then get yourself a massive loan on a credit card and pay the minimum payments forever. You know it makes sense.

  22. Lindsay McDougall
    March 15, 2011

    You are 100% right on this and there is a simple remedy. Raise base rate to 3% in fairly short order.

    But don’t forget that the government deficit is much worse than the official figure, perhaps 150% of GDP, because of the PFI off balance sheet debts. There is a company involved in the PFI market for hospital building that employs only 14 people and makes 50% (yes, five zero) per annum return on capital deployed. This contrasts with a figure of about 6% for ordinary businesses.

    I believe that the Chancellor of the Exchequer says his prayers every morning, beginning with “Lord, make me chaste – but not yet.”

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