Bank lending

[andrewducker]

There’s something about the government's repeated attempts to make banks lend more that troubles me. If banks aren't lending to businesses then it's because they view them as being high risk for repaying them. Lending to people who weren’t able to pay it back was the prime cause of the recent banking boom/crash.

So why do we think that loosening lending requirements is a good idea now?

I’m serious, can someone explain it to me?

Comments

[gominokouhai]

Because we gave the banks a shitload of taxpayers' money so that they could put it out into the economy. And then there was quantitative easing which was supposed to produce more money to be used in the economy. Instead the banks are just keeping it all and, every night, once the customers have gone, they take turns in the vault pretending to be Scrooge McDuck.

[matgb]

Nope.

The crash was caused by excessive credit and hte banks lending too much to the wrong people.

They've changed the regs to make sure banks have more capital and are more responsible in their lending.

Then they complaint he banks don't lend as much as they used to.

[bart-calendar.livejournal.com]

Because that's not the reason they are not lending. They are not lending because Interest rates are so low that after factoring in the labor and related costs of evaluating the credit rating of the business, negotiating the loan, making the loan, collecting on the loan, etc... the bank would, at best, break even, and probably actually lose money on the loan.

To get banks to loan money you have to set Interest rates that make lending money profitable. That's not happening with business lending right now.

At the moment, the real money in the lending market is for banks to lend money to Spain and Italy, which has a high rate of return and the odds of the EU letting Spain or Italy default is low.

So... US and UK banks are sending tons of money to Spain and Italy that could otherwise be used to help their home country's economy.

[andrewducker]

But banks are free to set any interest rates they like. If Barclays wants to lend businesses cash at 20% then it can.

I thought that everyone was pulling their money out of Spain, with the result that they couldn't borrow the money they wanted?

[bart-calendar.livejournal.com]

Spain has no problem at all getting people to lend them money. Spain's problem is that the interest rates they are offering to get the loans are very high.

I don't know the law in the UK. In the US, banks can only charge a certain amount of interest over the "Prime Rate" which is set by the government. Currently in America the Prime Rate has been set so close to zero that the amount that banks can legally charge in interest without running afowl of "usury" is so low as to make the loans not profitable.

[andrewducker]

Aaah. There's no maximum interest rate in the UK.

[bart-calendar.livejournal.com]

It really sucks for the US economy. The Federal Reserve is keeping interest rates really low because they are terrified of inflation and higher interest rates lead to more inflation.

But... the government needs businesses to start up and to start hiring again and the best way to make that happen is to make bank loans available to them, but there is no way banks will do that with the interest rates so low.

[daveon.livejournal.com]

It's interesting for me to see that even with the low interest rates in the federal system most people are locked into 5%(ish) mortgage rates.

That said, I do worry about what the banks do if rates go up more as most of these are fixed rate deals.

[daveon.livejournal.com]

Spain doesn't have a problem borrowing money, the problem is the interest rates the Bond Market are demanding on 10 year bonds are now at a point where the Spanish can't possibly pay it back - conventional wisdom has that at about 7% at the moment.

People/Individuals are pulling money out of Spanish banks as Euros and putting it elsewhere because they don't want their Euros magically becoming Pasetas and being worth bugger all squared.

[kurosau.livejournal.com]

I don't think I agree. Banks should be able to be profitable with loans and other credit lending even in an environment with a low interest rate. Furthermore, the lower the interest rate the better of an idea it is to borrow money.

I think, at least in so far as the US is concerned, we're looking at the equivalent of banks getting handshy. And with the recent controversy over libor manipulation, I think we're seeing the mechanism by which that happened.

[rhythmaning.livejournal.com]

I agree - banks can always lend out at more than it costs them to borrow, so they should always make a profit. Except if other banks think they may go bust, in which case they won't lend.

Since it appears many banks may be bust - what with Greece, Spain, Italy and so on - banks don't want to lend to each other in case the counterparty goes bust.

[daveon.livejournal.com]

There's a separate issue which is a side effect of Glass-Stegal being repealed.

You *could* lend money and make a steady 8%ish return on capital, or you could get into bond trading and other investment activities and make a 10-20% return on capital.

If your business is to make money, it makes more sense to do the more profitable activity.

In the old days, which we are almost certainly going to have to return to, commercial/deposit banks had to make money through lending activities rather than weird fiscal vehicles.

[daveon.livejournal.com]

This.

[coth.livejournal.com]

Because the banks are not carrying on ordinary business lending. So, for example, when a business that took out a loan three years ago to invest in (eg) a new product or new plant comes the banks are refusing renewal which means the business has to pay the loan back when they had expected to refinance. This can cause a business to go bankrupt. Banks are refusing letters of credit that allow trade to happen. They are refusing to lend for new investment. All of this means that less business is being done than would be if the banks were lending, and all that missing business is not employing people or paying taxes.

Does that explain it?

[andrewducker]

Presumably they're not carrying on ordinary business lending because they don't believe they'll get their money (plus interest) back? In which case, forcing them to do so just means that you're forcing the banks to lose money (and thus have to be bailed out by the government _again_).

Or do we think that the banks are being overly cautious, and could be making a profit here, if they weren't so risk averse at the moment?

[coth.livejournal.com]

Lots of people think the banks are too risk-averse at the moment. But bart_calendar's points about banks costs and profit potentials at zero/low interest rates are also directly relevant.

[a-pawson.livejournal.com]

It's not terribly surprising less money is being lent by banks given that we are in a recession. It is no good lending to businesses that aren't sufficiently profitable.

There are also less businesses seeking loans due to the state of the economy. More than usual are not seeking to expand but are hunkering down and hoping to ride out the next few years.

It's easy to get some small business owner on the news complaining that he/she can't borrow money, but the reality is the banks are not short of money to lend and they would do so if they thought it were going to be profitable for them to do so.

[daveon.livejournal.com]

Let's use an anecdote. I have an Overdraft on my UK bank account. I've had it for years, I service it monthly and haven't really given much thought about it.

I've been asked to clear it. Out of the blue, I've had my account referred to a 'risk manager' because I don't have a regular income going into the account anymore, and they aren't prepared to allow an Overdraft in excess of the amount that regularly goes into the account.

I've never failed to pay them money, they used to automatically extend it if there was an issue. But RBoS/NatWest have obviously been told to reduce unsecured borrowing and do it an aggressive way.

In the US I'm starting a new business. I currently have over $60,000 in Accounts Receivable.

My bank bounced a cheque last month because it would have put us overdrawn by $38...

Banks are just not working as banks at the moment.

[octopoid-horror.livejournal.com]

they aren't prepared to allow an Overdraft in excess of the amount that regularly goes into the account.

Banks are just not working as banks at the moment.

Personally, I would view the first as acceptable (in the absence of a full credit check) and the second as true, with the addition that banks are sometimes not working as banks used to and this is in many ways a good thing.

I have a credit card that will happily let me run up a bill that, at the minimum repayment, would take me almost a decade to pay back, before factoring in interest. At the point when I originally got the credit card (which had a lower limit then), I was regularly going over my overdraft limit on my current account (which was higher than a month's salary so there was no way that I could pay back the full overdraft in a month if anything changed) and getting hit with charges just before every payday. When I wanted a loan for something (because I was close to my overdraft limit but wanted to book a trip away and couldn't increase my overdraft limit) a friendly person who I had been directed to in the wrong department advised over the phone that I should lie about the exact reason I wanted the loan in order to get it.

Did I like being able to spend money that I didn't have? Sure. Should I have been allowed to? With hindsight, fuck no, not to that level! I could easily have got about £5000 in unsecured debt when I was earning rather less than £1000 a month after tax without any real effort.

But RBoS/NatWest have obviously been told to reduce unsecured borrowing and do it an aggressive way.

The impression that I have got is that banks are being told to reduce risk and increase it at the same time. Unsecured lending has led to some large losses, so it's understandable that they are being encouraged to avoid it (whether internally or externally) It might be difficult for me to get a mortgage without a huge deposit, but then I also know people who arguably got mortgages that they couldn't really afford when Times Were Better.

Of course, people not spending money because they don't have access to easy credit has consequences for the wider economy. But on a personal ethical level, I'm quite happy with that since to me, personal debt is often far too acceptable and even expected. There are situations where it's unavoidable and a problem... but on the other hand, going into debt just for a holiday or a nice new computer because your old one won't run Call of Duty 4 is just stupid.

[daveon.livejournal.com]

Well, it bugs me in that I have to send money back at a crappy exchange rate to pay down an overdraft at a very reasonable rate of interest which I've managed without thinking about for, wow... I can't really remember.

But it's symptomatic of the fact that to manage our cashflow for the business at the moment the only capital raising option I have is to give up equity in the company which actually isn't my preferred option at all.

Core of this is lending money at interest just doesn't give very interesting returns when banks have got used to double digit returns on capital over the last 20-30 years, which is going to leave us with serious problems economically speaking until banks actually get used to making money of liquidity again.

And I'll give you that credit was far too easily extended. As a side note, I had a real problem when we bought our flat in London because we only wanted to borrow about 2x joint income and it was obvious that the estate agents and mortgage brokers wanted me to borrow 4-5x...

[daveon.livejournal.com]

Unsecured lending has led to some large losses

I'd actually argue that unsecured lending hasn't been as much of a problem in all this as secured lending against mis-valued and/or misunderstood assets.

[strawberryfrog.livejournal.com]

And why are the banks not carrying on ordinary business lending?

[sbisson.livejournal.com]

There is the other side to the story, as while demand is low, businesses are paying down debt, so aren't actually looking to borrow.

Keynes was right :-)

[marrog.livejournal.com]

As far as I can tell the moral of, like, life, right now, appears to be 'Keynes was right'...

[lil-shepherd.livejournal.com]

As I understand it, the banks aren't lending because they are using the money the government has been pumping into the economy and at them to re-capitalise themselves.

[drplokta]

The banks have jumped from one extreme to another -- from being too lax with their lending, they're now being too restrictive. Basically, we always want them to adopt an intermediate position to prevent booms and busts, but unfortunately the intermediate position can only be identified with the benefit of hindsight -- during a boom it seems to restrictive, and during a bust it seems to lax.

[steer.livejournal.com]

Is it at least in part an issue of a self-reinforcing system?

I present the following simplified model which I think is not really the truth but is an acceptable model.

If banks do not lend we will continue to have a crisis of liquidity and the economy will continue to tank in which case the banks' decision not to lend will seem correct.

If the banks do all lend then the economy will pick up and the decision to lend will appear to be a good one.

If one bank lends and the others do not then the economy will continue to tank and that bank will look to have acted foolishly.

[andrewducker]

Yes, kinda. It's a bit like the beauty pageant thing - in that you can boom/bust around the central point, but the central point still matters somewhat, as neither gloom nor exuberance are infinite.

If the banks keep refusing to lend indefinitely then yes, we'd be in a lot of trouble, but the UK can't just decide to turn the taps on - we're locked into the global economy, and it's arguable as to whether we've actually adjusted fully for our over-extension.

[steer.livejournal.com]

We are, to some extent, locked into the global economy of course. On the other hand we definitely can just decide to turn the taps on (quantitative easing for example) in some ways. Small business lending within the UK could be a good way to kickstart. Plus, as someone else mentioned, other banks are building up their financial reserves and being cautious so are trading off "loan which will in our opinion make a profit" versus "safety margin of big wodge of money".

[steer.livejournal.com]

But, to be fair, I am a Keynesian through and through... so I advocate spending your way out of recession.

[andrewducker]

I think most right-thinking people are. The problem being that we should have saved during the boom, which we completely failed to do, bad Keynesians that we are.

We should definitely have moved a hell of a lot faster to get infrastructure projects up and running though.

[iainjcoleman.livejournal.com]

Yeah, everyone is a Keynesian once a recession hits. The point is to be a Keynesian in times of growth, which Gordon Brown spectacularly failed to do.

I struggle to think of any single politician who has done more damage to Britain in my lifetime than Gordon Brown. And yes, I'm including Thatcher.

[andrewducker]

Between 1997 and 2010 the rich got staggeringly richer, we spent lots of money we should have been investing better, while continuing with PPI cracking down on people on welfare and disability (without getting them out of that trap), and engaging in illegal wars.

I wouldn't have been surprised if this had happened under a Conservative government. For it to happen under a Labour one???

[gonzo21.livejournal.com]

I wonder if house prices might have something to do with it too. There has been a housing bubble, a vast one, people paid way over the odds for property, but to avoid another huge bursting and people winding up with massive negative equity, interest rates are being kept artificially low, and they want the banks to start lending more money to home buyers in order, I think, to artificially get the property market going again.

Little realising that the run-away property market was a large part of what got us into this mess in the first place. And I think a readjustment needs to happen, and people will just have to be stuck with the negative equity.

[andrewducker]

Well, flat for several years, at least.

[sbisson.livejournal.com]

The flat downstairs just sold for a little under half a million quid. I'd say that there's still a bubble in some parts of the country...

[daveon.livejournal.com]

When I was looking at Estate Agent windows when I was last back, Ealing seems to be holding up very well too. But I deliberately bought within walking distance of a cross-rail station and that seems to be getting factored in.

[rhythmaning.livejournal.com]

My take (and I haven't read through all the comments - I did start, but was about to get into a discussion when I thought I ought to lay my stall out first) is that poor lending decisions (brought about by - wait for it - low rates resulting in investors to take on more, perhaps unintended, risk in instruments they didn't understand) got us into this mess back in 2007, and low rates and lots of lending aren't going to get us out of it.

My belief is that what with the eurocrisis and on-going capital issues, banks are short of cash - there is a liquidity crisis (hence central banks keeping rates so low - if they were higher, banks would start to go bust). By literally pushing money on banks - with the proviso that they lend it(rather than use it to shore up their capital) - the BoE is trying to loosen the credit crunch.

You have reminded me that I have been trying to get me head around this for the last year or so - I started to write a post to sort my thoughts out, but it got so convoluted that I decided it would be little use to anyone but me! Maybe I should resurrect it.

[daveon.livejournal.com]

I'm not convinced we have a liquidity problem at the moment, the central banks are keeping rates low in the hope that this will stimulate some movement in the money supply. Except we're stuck at zero with no 'heterodox' system for getting people to spend more money.

US, UK and German backed bonds are being sold with effective 0% returns on a 10 year bond at the moment which suggests that there's loads of cash it's just parked doing nothing except maintaining it's value.

[andrewducker]

Please, yes!