How unfair. I have a great idea for a new website but my bank doesn’t want to lend me the £50m I need to start it up. It claims not to like my business plan but that can’t possibly be right. What can I do? Oh, I know, I’ll tell my MP. It’s perfect timing: banks are making money again, which shows they are truly evil (just as evil as when they were losing so much not that long ago; they can’t win).
I’m being facetious, of course, but this sort of nonsense is what passes for intelligent debate about the UK economy. I love entrepreneurs – but thankfully they have never been able to obtain all the credit they are invariably convinced they deserve. Watch the BBC’s Dragon’s Den: most ideas don’t stand up to scrutiny and are rightly denied financing. The same is true of many projects presented to the banks. In some cases, of course, the jilted entrepreneurs are right; banks (and venture capitalists) often get it wrong, out of ignorance, incompetence or short-sightedness. But what wannabe borrowers say ought to be taken with a bucket of salt.
So what are the facts? HSBC’s new small business lending was up 38 per cent in the first half; across all top banks and all small firms, the amount of new lending is down on 2009, at £520m per month, just enough to match repayments and defaults. Why? Demand for credit has dropped. Uncertainty means firms are trying to reduce their debt; small firms hold a record £56bn on deposit. HSBC’s corporate overdraft utilisation rate has fallen to 42 per cent, from 44 per cent: facilities are not being used. Rates are neither ultra-cheap nor extortionate: small corporate borrowers are not usually being priced out.
The supply of credit has also diminished. Banks have rightly become more realistic when assessing projects in a low-growth environment. Some lenders have quit the market. The remaining ones have been told to put more money aside (boosting capital), to shrink balance sheets, and to borrow less on the wholesale markets (a problem given that low saving rates have forced many banks to rely on money markets to fund new loans).
The coalition is being maddeningly inconsistent: it wants banks to retain more capital for every pound lent out, reducing the availability of credit and hiking its cost; it is simultaneously imposing a tax on wholesale financing, forcing an even greater reliance on non-existent savings to finance lending. Then it moans about insufficient credit, forgetting all the while that the bubble was driven by excessive loans dished out far too easily.
Meanwhile, banking is becoming more competitive; margins are easing. The average two-year fixed mortgage rate fell 0.11 percentage points in June to a record low of 3.67 per cent. ISA rates rose 0.24 points. Rates on time deposits are up 0.50 points in six months, despite lower swap rates.
The banks want to lend; that is how they make money. If they are not – and I have yet to see real evidence, as opposed to self-interested surveys, that small firms are being squeezed more than usual – there must be a reason, and this will almost certainly have to do with the government’s own policies. It certainly has nothing to do with bonuses for investment bankers (this problem is about retail banking) or dividends, which are necessary to attract this extra capital. One thing is sure: no politician can possibly know what the “right” amount of credit is for the UK. We’ve tried central planning; it doesn’t work.