Why will the banks pay any attention to Darling this time?
Over the last year or so I have lost count of the number of times that Alistair Darling, Gordon Brown and myriad other government ministers have claimed that they are going to get banks lending to small businesses again at decent rates. Despite their numerous interventions and despite the fact that many of the banks are partially or largely owned by the taxpayer, so far the government has not been able to get them to change their approach. Darling was at it again yesterday.
I run my own small business but we are in the fortunate position of not needing to go to banks for finance. I shudder to think what would have happened to our business in the last 6 months if we had have needed to though. I have read so many stories about what seem like perfectly viable businesses who need temporary financial assistance either to get over a cash-flow bump or even to expand and where the banks just refuse to help or offer ridiculous and clearly profiterering rates of interest that it is now clearly desperate.
True Blue Blood published a guest post yesterday from a contributor "RussRec" whose story about trying and failing to get help with his recruitment business is all too familiar.
The thing is though that the behaviour of the banks is damaging our economy and our recovery. Every time they turn down a viable business for financial assistance or price them out of the market they are consigning more people to the dole queue and in a lot of cases it seems completely unneccessary. It is a self-reinforcing cycle where the more they delay the recovery, the longer it will be before they will feel comfortable lending to businesses at reasonable rates again.
The most annoying this is that it seems to me the pendulum is now swinging too far in the other direction. 2 years ago, banks were falling over themselves to lend to all sorts of individuals and businesses, now they will hardly lend to anyone. In both cases they were not being driven by rational motives but by following the herd, terrified of either not lending enough previously, or now lending too much.
I am not advocating that banks should be lending to unviable businesses. Of course they should not do that but from what I can see they are going way beyond excluding businesses like that with their caution.
I can understand that the government does not want to interfere with the running of the banks on a day-to-day basis but they must surely see that a quiet "gentleman's word" with those running the banks (followed by a load of spin where they pretend they have "got tough with them") has not worked on the occasions they have tried it. I am instinctively against intervention but the banks have proven themselves incapable of doing what we all (including themselves ironically) need them to do. The government has to come up with a way of changing the environment so that banks do start lending. Otherwise, what was the point in pouring the hundreds of billions of our money into the banks? They might as well have kept that money and set up their own bank to do the job for them until the recession is over.
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The reason banks are less than willing to expand their loan books, rather wish them to contract, is bound up with the nature of the Great Recession and the policy response. By opting to bail-out the banks through effectively paying them for their bad assets, the Government has left the banks both undercapitalised and with a preference for holding “bad” assets rather than “good” assets. Accordingly, from the banks’ perspective, the lack of capital means there is every reason to shrink their loan books but to do so in a way that prioritises retention of “bad” assets since these are heavily subsidized and/or underwritten by government bailout. Hence, appetite in the banks for continued or fresh lending to sound businesses is limited. So the answer to your question is “no, the banks will not listen to Darling".
A further consideration at the macro-economic level is that this is not a Keynsian type recession. This is discussed at http://blogs.ft.com/maverecon/2009/06/after-the-crisis-macro-imbalance-credibility-and-reserve-currency/#more-1831 .
My experience of banks and lending is somewhat different from the picture that is painted of the current situation.
I too run a small business and tend to see my bank manager once a year at the time that my overdraft needs renewing. In January 2008 he asked if I'd like to borrow £100k @B of E base +4.5%, this year he offered the same loan at base +2.5%. Once again I declined his offer although I did extend my overdraft by £5k to cover an expected 'unexpected' expense. I've had no problems accessing funds from my bank.
After being told they were acting irresponsibly the banks are now being told they are too cautious .. .. how can they possibly win? If they loan money to businesses that go under in the recession they'll be slated as the big bad evil all over again.
Is it the rate of interest which is causing the problem or the non-availability of funds?
I can get 4.2% on lending to one of the government supported banks; they obviously must lend out at a higher rate to make a profit. And the government has told them to get their share vale up, in order that they can start to sell the shares without making a loss. Shares only rise if a company is making more profits than previously. As I've said elsewhere, as a lender I want a sensible rate of interest, if it were any lower, I'd probably go and buy US dollars and put them in the safe and they'd have even less money to lend.
What better - a loan at a rate determined by the market, or a loan at 1% above bank rate, but a years' wait for funds?
The Bank Rate is largely irrelevant these days.
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