The State of Bank Lending
The Bank of England’s Paul Fisher has given an interesting speech today on ‘Developments in financial markets, monetary and macroprudential policy’.
I’d recommend a taking a look the whole speech but what I found especially striking was the chart below:
It shows the growth rate of bank lending to households and non-financial firms (best thought of as ‘the real economy’) since 2004, with the collapse from early 2008 onwards and the lack of a real recovery since. In one word, is shows deleveraging.
Fisher spends quite a bit of the speech discussing the Government’s Funding-For-Lending (FLS) scheme in detail.
A few points stand out. First the Bank of England seems very reluctant to suggest that FLS will actually boost net lending, at best it may succeed in stopping net lending from falling.
The crucial impact will be whether the FLS enables them to lend more than they would have done in its absence.
Second, the overall success of the scheme will basically come to what the big banks choose to do:
The first point I want to make in reply is that banking in the UK is far from a perfectly competitive market. The six biggest lenders account for the vast majority of lending to UK businesses and households – and the seventh largest accounts for less than a third as much as number six. In large part the quantitative success of the scheme will depend on what these larger lenders do.
Third, FLS is something of a scatter approach to supporting lending – not targetted at where credit is especially constrained:
The FLS does not seek to allocate credit to particular parts of the economy directly – the Bank is not taking a view on this matter. But SMEs and first time home buyers in particular are thought to be credit hungry. Banks will collectively need to meet that demand if they are individually to make the most of the FLS. Not necessarily every bank will support every sector. But if the big firms don’t then the smaller banks will. We are relying on the pressures of demand and supply, and competition, to ensure that credit flows to where there is demand.
Whilst there is much to welcome in the FLS scheme, I think these are all valid concerns – it relies on the big banks, it may not address acute areas of credit shortage and, in the final analysis, it may not succeed in boosting net lending.
The British Business Bank announced by Vince Cable yesterday will be better able to target areas of credit shortage but is unlikely to be up and running for another 18 months and is of limited size. The TUC has called for a far more radical appoach to getting banks to support the real economy – with proposals including a ‘proper’ state investment abnk to support SMEs and infrastrucutre, boosting the role of the Green Investment Bank, new regional SME banks, a greater role for mutuals and a shake up of the position of the Too BigTo Fail banks that dominate UK banking. Implementing such a programme would help get credit following again.