There is, or hopefully more accurately has been, a schizophrenic quality to the attitude of UK banks to risk. Or, perhaps to be slightly fairer, they have a tendency to over-correct when things go wrong on the lending front.
My brother-in-law was a long-standing bank manager, until he got thoroughly fed up with the constant pressure to sell products and services, leaving with great timing, just before the banking crisis took form hold. He was fond of recounting the tale of a bank manager in Cornwall who won all sorts of bank awards for his lending to the hotel fraternity in Newquay in the late 1980s. A few years later, the bank in question was the biggest hotel owner in the UK surfers’ paradise, having repossessed the hotels in question when the loans went into default.
There was an over-correction to bank lending habits in the light of the recession of the late 1980s/early 1990s, and we are certainly seeing a similar, if not more dramatic, correction now.Clearly it is not of great help to economic stability to have banks keeping their money firmly in their pockets in hard times and throwing it around like mad in times of relative boom. However, I should say that one recent experience does suggest that the banks were way too careless with who they lent to in the period leading up to the crisis.
One of the aspects of a criminal case into which I was preparing a forensic report was a mortgage fraud, in which the defendant had on three occasions borrowed well in excess of the value of his residence by misleading banks about that value. Part of the information that the defendant had given each bank was that he had paid £1.5 million for the property when he acquired it in the late 1990s.
Now Sherlock Holmes I am not, but in preparing my report I thought it would be of interest to see what I could discover about the acquisition of the property from the Land Registry website. It took me less than 5 minutes to discover that in fact the price paid for the property when acquired by the defendant was £450,000.
I can’t help thinking that if I was going to lend someone several £million, I would probably take the 5 minutes to check this out, and if the last bank to make a loan to the defendant had done so, it would have saved itself several £million, which I would define as time well spent.
Anyway, I digress. The banks are sitting tight on their money and not lending it to businesses, and are charging home owners interest rates out of all proportion to the base rate of 0.5%. The government whose predecessor bailed out the banks at enormous cost to the taxpayer is not best pleased about this, and has made various attempts to loosen the purse strings of the banks. And at the end of last week, two further initiatives in this respect were announced.
The first of these is a scheme whereby the Bank of England will make readily available to banks short-term funds on less stringent terms re: security than is currently the case. The point being made is that the banks need not hoard cash, and can thus start lending again with renewed confidence.
The second initiative is the ‘Funding for Lending Scheme’, whereby the Bank of England will, most unusually, lend money to the banks with the express purpose of getting it out into the real economy to support businesses and the housing market, rather than as a more general credit mechanism for commercial banks. The official details on this are somewhat sketchy, but BBC economics editor and prophet of the banking crisis Robert Peston has some inside information from Bank of England officials:
The loans will be for the unusually long term of 3 to 4 years;
The banks will have to commit themselves to lend the money to businesses and households (I like Robert Peston’s description of this as “cross their hearts and hope to die”)!
It appears that £80 billion of new loans might be on the table in this respect.
The trouble is, as Robert Peston I think rightly concludes, that there is actually a very limited appetite for borrowing among those who might be seen as the natural beneficiaries of this scheme. We have all seen the consequences of running up large debts (whether personal or corporate), and my generation (50 this year) are faced with a depressing cocktail of inadequate mortgage endowment policies, poorly performing pension schemes, children’s university fees and rising retirement age, which is hardly the recipe for rushing out to borrow some more cash.
Those who urgently need to borrow, on the other hand, would be the type of borrowers that banks would not usually touch with a bargepole in the current environment, namely those in some financial distress. It is one thing to be given access to funds by the Bank of England and another to lend it on to people who may well not be able to pay it back. Given the apparent reluctance of Government and Bank of England to guarantee bank lending, this may be the catch with this latest initiative, although there are existing schemes to guarantee bank lending (National Loan Guarantee Scheme / Small Firms Loan Guarantee Scheme) which may be a positive factor in this equation.
The danger is thus that the banks may live down to their stereotypical image of organisation that will ‘lend you an umbrella when it is not raining’, and that once again a well-intentioned government initiative to get the economy moving may fall flat. A gloomy pciture indeed, but I fear a realistic one.