The play-acting and grandstanding this week by Darling (with Mandelson creepily at his elbow) is sick-making in its hypocrisy. The Banks have told to correct their balance sheets (and they’ve made a start) and asked to increase lending. The two are incompatible!
The shortage of lending is to a great extent caused by the absence from the scene of foreign banks domiciled here in London. (British banks have lent almost as much as ever) The other thing - as Ruth Lea points out - is that wholesale funds which the banks need for lending is much more expensive for them. So loans are more expensive too. The plain fact is that the Chancellor has lost control of events.
Christina
THE TIMES
29.7.09
Big-bank bashing is pure political hypocrisy
The days of easy lending are emphatically over, as the Chancellor well knows. It was his Government that let debt run wild
Ruth Lea
Alistair Darling made it clear this week that the Government had not rescued the banking sector “out of some charitable act”, so the banks had a duty to get lending. At the meeting with the chief executives of seven of Britain’s biggest banks he effectively threatened them with a competition inquiry if they failed to increase cheap lending to mortgage borrowers and small businesses.
Without wishing to act as an apologist for the banks — and goodness knows there have been shocking failures of governance and supervision — the Chancellor’s stance suggests little more than political grandstanding. He surely already knows why the banks are behaving as they are. He knows that they need to raise margins to rebuild battered balance sheets.
The Bank of England’s Financial Stability Report, though it may not be everyone’s idea of a ripping yarn, contains some excellent explanatory material about the state of Britain’s banks. It does not make for very happy reading. In fact, it makes for very grim reading.
Briefly, the Bank makes it very clear that banks’ balance sheets remain weak and are vulnerable to any setbacks in the recovery of the financial markets or the wider economy. If business’s bad debts rise or mortgage defaults accelerate significantly, such losses, on top of their current holdings of “toxic assets”, would further impair their balance sheets and curtail their ability to lend. But even if this does not happen on any great scale, given the economic uncertainties, banks may still wish to reduce their total lending compared with capital from the current high levels. Indeed, the regulators are likely to insist on this, especially for the big banks.
Banks have little choice but to behave cautiously. The heady pre-crunch days of cheap and plentiful credit, which so distorted the economy and people’s perceptions of financial normality and left such a toxic legacy of indebtedness, are demonstrably and emphatically over. We had the party, the party is over and now we have the hangover.
The Bank’s report makes some very pertinent points about the cost of raising funds. British banks have a huge, £800 billion “customer lending gap” — the difference between customer loans and deposits. This means that they are overdependent on the wholesale financial markets in which costs to the banks have risen significantly over the past year.
In addition, the Bank states that the withdrawal of overseas funding, as foreign banks display “home bias” and desert British customers, and the stiff competition for domestic deposits have added to the banks’ funding pressures and costs. The bank rate may indeed have fallen to historically low levels, but the costs to the banks of raising much of their funding have actually increased.
The Financial Stability Report concludes that “there is a risk that — in the event of further adverse macroeconomic or financial sector developments — banks may not supply sufficient credit to support growth in the economy”. In other words, another financial shock or a prolonged recession could result in their being unable to support adequately economic recovery. This is a serious point, and one that has been made by the Governor of the Bank on several occasions.
So Chancellor, you must surely know what the banking sector’s problems are. The Bank of England’s report could not be clearer. The casual observer can, therefore, only conclude that this latest outbreak of big-bank bashing is a political distraction, an attempt to find a scapegoat for the continuing problems of the economy. Of course, there is still considerable anger at the way that the senior directors of some of the big banks behaved in recent years and their insouciance as they pocketed large sums of money for staggeringly spectacular failure. They are easy targets.
But the Chancellor’s criticism would seem less hypocritical if his Government had not allowed the party to run for so long and so much debt to be accumulated by so many. It was no secret, for example, that Northern Rock was promoting 125 per cent mortgages and, more generally, that overgenerous lending was leading to an unsustainable housing market bubble that would have to “correct” itself at some point.
Yet when he was Chancellor, Gordon Brown and his creation the Financial Services Authority made few moves to restrain the wilder excesses of capitalism and the Bank was scarcely in a position to do so: its main job was to hit the Chancellor’s inflation target, which it did.
Politically, the party was good box office and the banks contributed to it. Metaphorically, they bought the drinks. And Mr Brown, as Chancellor, exploited politically the apparent buoyancy of the economy many, many times.
This is, however, no consolation to businesses as they struggle for funding in these difficult times. Some businesses, notably large businesses, can bypass the banking sector and raise equity or issue corporate bonds. And many businesses will rely on retained profits to see them through the worst.
But many small and medium-sized enterprises rely on bank capital, and banks’ lending decisions can prove to be a life or death matter for them. Unfortunately many businesses are closing and will continue to close, and some may be tempted to treat their banks as scapegoats if they refused to lend to them when they were in distress, even if their business was probably no longer viable in our straitened times.
Banks have to be cautious in the present economic climate. The Financial Stability Report explains in all too graphic detail why this is the case. If I wanted to go to Limerick, no, I would not start from here.
But, Chancellor, we are here and you know it.
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Ruth Lea is economic adviser to Arbuthnot Banking Group and a former director of the Centre for Policy Studies
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