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Hypocrisy at the heart of banking policy

Allister Heath
PATHETIC. That is the only way to describe Alistair Darling&rsquo;s ridiculous, stage-managed, utterly fake &ldquo;row&rdquo; with Britain&rsquo;s top banks yesterday. It is the mark of a desperate, dying government that it feels obliged to resort to such a ridiculous piece of make-believe, rather than engaging in proper policy-making. To demand of the banks that they lend more, as Darling did yet again yesterday, will achieve absolutely nothing. He knows it and they know it &ndash; but everybody goes along with the charade because they don&rsquo;t really know what else to do. <br /><br />First things first. Why does the government want the banks to lend as much as they did in 2006-2007, at the height of the worst, most unsustainable bubble in decades? Does Darling really think than an economy can borrow itself out of debt? And the likes of Barclays and HSBC &ndash; private firms that were not bailed out -- are in a very different position to RBS, Lloyds and Northern Rock, all three of which are state-owned. It is absurd for Darling to own a controlling stake in several top banks and yet claim to be powerless at controlling them. It beggars belief that the government feels it has the right to preach to institutional investors about being absentee landlords while admitting to exactly the same failing with its own holdings.<br /><br />The chancellor is even hinting that he may undo his government&rsquo;s decision to allow Lloyds to buy HBOS, or at least that he might force a competition inquiry. If he does, no investor will ever trust this government again when it makes a promise.<br /><br />Just about all the assumptions underlying Darling&rsquo;s thinking, if we can call it that, are wrong. There has been a reduction in the demand for loans, something which he has evidently failed to grasp. Supply is harder to gauge. There is still plenty of mortgage credit available, assuming buyers have a deposit. There are fewer 95 per cent mortgages, but this shows that lenders have grown up: they don&rsquo;t want to be wiped out if house prices fall another 5 per cent. <br /><br />The biggest change is that many foreign banks (such as the Icelandic lenders) have quit Britain. One cannot expect British-based banks to step in. UK banks such as RBS have cut back on their overseas lending, for example. Darling has no right to moan. <br /><br />Other banks &ndash; such as Northern Rock &ndash; are no longer growing at a crazy rate by imprudently borrowing on the money markets. Again, this has left a hole in the market &ndash; but in this case it is a good thing that financial institutions are once again trying to raise funds from depositors to finance their lending, rather than taking dangerous shortcuts. <br /><br />And that, after all, is the point. Do we want prudent, sustainable banks &ndash; or do we want a return to boom and bust? The government&rsquo;s policies are utterly inconsistent. On the one hand, it is (rightly) asking banks to hold much greater amounts of better-quality capital. But to do this, either they need to tap shareholders for more equity &ndash; or they need to put aside retained earnings. In both cases, that requires making much higher profits &ndash; which is what Darling was bemoaning yesterday when he claimed that the profit on a two-year mortgage has risen 450 per cent in the past two years. To add to the hypocrisy, Darling wants the state-owned banks to return to profitability so that he can reprivatise them at minimum loss to the taxpayer. What a disgraceful muddle. allister.heath@cityam.com