THE row over bank funding is hopelessly confused and outrageously over simplified. The Bank of England is pumping billions in cheap funds into banks and savers are being screwed to the floor, but those evil bankers are still holding their fat cat boots to the throat of the real economy, choking off growth. Or so goes the story.
Yes, the Funding for Lending Scheme (FLS) has given banks £13.8bn so far and, yes, net lending – money lent out, minus debt repaid – by the 38 banks taking part has fallen £1.5bn. But that’s not the whole story. Banks are under huge pressure from regulators and politicians to cut back on lending.
In the aftermath of the financial crisis, capital controls have been tightened to put a brake on risky lending. That very deliberately focuses on small and medium-sized enterprises (SMEs), while high loan-to-value mortgages have come to be seen as an icon of the excesses of the boom years.
The Bank of England is encouraging banks to put aside extra capital to make sure they remain stable in the face of any renewed Eurozone crisis. The state-backed banks face increasingly direct, not to mention contradictory, orders from politicians to simultaneously slim down, and to rush to the aid of SMEs and households with extra credit. And on the other side of the transactions, consumers and firms have been told to deleverage, that they should stop relying on loans to finance consumption and spending, and instead pay down debts and live within their means.
Together RBS, Lloyds and Santander have seen net lending fall by £14.3bn since the middle of last year, according to the Bank of England’s figures. Yet all three have increased SME lending, while the bailed out pair are giving more first time buyers mortgages – so how can that add up?
RBS and Lloyds have been actively refocusing on their core markets: UK retail and business lending. That means cutting back in other areas like commercial property. So even though Lloyds increased SME lending by four per cent last year, and RBS hiked core lending by £1bn in the past six months, that was outweighed on the FLS measure by cuts to non-core lending.
Santander’s problem comes from new regulatory hurdles, particularly those targeted at cutting risky lending. The bank is also rebalancing, shifting away from its traditional base of mortgage lending and into SME loans, but new capital rules mean that for every extra pound the institution wants to lend to SMEs, it has to cut five pounds from its mortgage book. So it too is contributing to growing firms and the real economy, but the FLS figures make it look like the bank is cutting back.
Demand is a key factor, too. In the fourth quarter alone, RBS, for example, saw SME loan applications plunge by 10 per cent. Banks are certainly far from perfect – they made some terrible lending decisions in the boom years and should be pushed to clean up their act. But calling for a new splurge of lending to risky SMEs and to over-leveraged households is no way to encourage financial stability and growth in the future.
Tim Wallace is banking reporter at City A.M.