Last night chancellor George Osborne made his annual speech to the City at Mansion House. His headline announcement was that since the banks weren’t lending enough to businesses and consumers, the government will intervene to help fund their lending. There’s no detail really, other than that it’s a joint initiative from the Treasury and the Bank of England, and that it will involve “coordinated action on liquidity and on funding for new bank lending.” The aim of it is to “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy.”
This is rather familiar. A year ago the chancellor announced ‘Project Merlin’, in which the banks would lend more in return for being allowed to pay bonuses. The bonuses were paid, but the lending was not forthcoming. Lending fell in 2011, and Project Merlin turned out to be a more or less meaningless exercise.
This new initiative apparently has £80 billion behind it and the banks have voiced their support. Shares in the finance sector have been rising on the back of the news today. But does it stand any chance of actually restarting lending, or will the banks just keep the money?
Fundamentally, the banks are unable to lend because they are trying to recapitalise, and they have yet to make up their losses from the financial crisis. They’re not getting their money back on some of the big loans they made in the boom times, leaving big holes in the balance sheet. A recent analysis of commercial property lending showed that the banks have £51 billion of debt maturing in 2012, and a total of £153 billion before the end of 2016. Much of that debt is in trouble. Nobody wants to buy it, the banks can’t afford to write it off, so they have no choice but to refinance it. Quite simply, the banks can’t refinance those debts and issue new loans at the same time.
Perhaps £80 billion from the government will help, but I doubt it. As I’ve explained before, we’re still asking the impossible from our banking system.
This leaves us without a working banking system, facing the threat of a new round to the credit crunch and possibly more banking bailouts. With the banking sector out of order, there’s no source of credit for the economy, depressing business and the housing market and prolonging the recession.
What do we do about it? The government is crossing its fingers that it can kickstart lending in the banks, but I can’t help thinking it would do far better by cutting out the malfunctioning middle man and issuing loans directly to those that need it.
UPDATE: Now that more of the detail of the scheme has emerged, it makes more sense that it did. Funding will not be available up front, but will become available in tranches, based on how much the banks actually lend out. This means the banks won’t be able to use the funds for other purposes. It does beg the question though – if the government wants to create money and lend it out, why doesn’t it just do it directly and cut out the middle man? It would guarantee that the money actually gets to those that need it, when the banks have repeatedly shown themselves to be less than trustworthy. And it would turn a profit and help reduce the deficit along the way.