U.K. at Impasse Over Bank Lending

Given that the U.S. after fits and starts essentially followed the British model for dealing with insolvent banks, this article from the Telegraph may give us a clue of things to come on this side of the pond.

Recall that the British government acted quickly and decisively when they injected capital into their largest banks and took an aggressive stance towards governance. Since that time, and much to the consternation of the politicians, the banks have failed to increase lending. This state of affairs has led to proposals for a subsequent recapitalization, a program similar to the original TARP in which the government would buy toxic assets and a proposal to guarantee loans. So far, none of those ideas are going anywhere and partisan politics seems to be the only thing prospering.

However, any further bid to restart lending by injecting more cash into the banks looked likely to land the Government in controversy.

Vince Cable, the Liberal Democrat treasury spokesman, signalled that his party would oppose the plans. He said: “We cannot have a situation where the taxpayer makes open ended financial commitments to the banking system when the banks then wilfully put their own short-term self interests ahead of the national economy.

“The banks are currently on strike, refusing to lend, and the Government is going to have to play the role of the strikebreaker as earlier governments did with disruptive strikes in the past. We cannot be held to ransom by senior bank managers.

“At present the Government is both confused and weak in its approach to the banks. It has got to set a very clear sense of direction since it is now the principle shareholder in much of the banking system, and then insist that the priority is maintained for keeping the British economy going through continued lending to sound businesses.”

It continues to confound me as to why the political class wants to induce banks to lend into a severe recessionary environment. The initial point of recapitalising banks both here and elsewhere was to shore up their balance sheets and unfreeze the interbank markets. Essentially, preserving the basic financial system. Loans will start to flow as bankable opportunities present themselves. Imprudent loans at this point of the cycle will only perpetuate the problem and probably lead to more calls on national treasuries for bank rescues.

The U.S. has had a smattering of this type of talk with regard to bank lending but it has been muted. The fact that we were in the midst of a transfer of power from one administration to another has probably led to the lack of rhetoric about bank lending. The current impasse in Great Britain may well be a preview of what lies in store. So watch what transpires there for some clues. It always helps to have someone else leading the way and making the first mistakes.

Comments

[gybognarjr]

The bottom line is: take back every penny from the banks, let them and us fail as we all deserve it. All of the meddling is only postponing the inevitable and necessary, total collapse of a credit based, bank controlled money supply. Let's do it now, get over with it and start again with government controlled money supply tied to GDP and trust in well managed money supply. banks shall also receive new charters, allowing them only core business and private lending without any other type of services. Banks shall only be banks.

2009 Jan 04 09:51 AM

[Greg Pinelli]

Taking money back...after putting so much psychological capital into "saving" them would throw markets into a huge tailspin...This is the REAL problem governments create..once down the road of saving businesses the helplessness and selfishness become endemic.....

2009 Jan 04 10:42 AM

[notsosmart]

the comments on this site show very clearly that nobody knows anything.least of all the anal sts that never review at years end their predictions.dont hear from the experts either.think for yourself & try to stay away from this whole mess as it has turned from investing to gambling for those that cant produce anything anymore.im not a union person but what a joke when congress & others who spend their lives shuffling phony rated AAA paper condem those that at least make something.unless we get back to making good products we are doomed.& that folks,include your children & grandchildren.do you care?

2009 Jan 04 11:36 AM

[Rob Viglione]

Banks lend as profitable opportunities arise. We find ourselves in a situation of overcapacity in which further deleveraging is likely required to shed unproductive assets. Forcing banks to lend will only make the situation worse. This kind of social engineering brought us to our current condition!

2009 Jan 04 02:06 PM

[johnbee]

I am English. The situation in the UK is that Banks are now just sitting on Government lent cash to cover their backsides from going bust. Worse, they are also demanding loans back from perfectly good small businesses with the prospect of ruining many thousands of them, and cutting credit card limits viciously even from the best of customers or demanding much higher rates to cover their previous negligence.

In my view since in effect without Government support all UK banks are insolvent due to their incompetence they should have their licences to trade withdrawn and be taken over by the Government or be told to trade as mutual societies for the bnefit of their savers and customers.

For two centuries many UK banks and savings societies and building societies (S&L's) - along with most insurance companies- were run as mutual organisations until the last decade when a rash of taking them public came about, inspired by the greed of the directors who persuaded depositors unwisely to take shares, and its all been downhill from there.

Without savers or interest rates there can be no borrowers and savers who invest in non profit mutualised companies will feel a lot more inclined to save. In turn the management, who will have no purpose to line their pockets with fake bonuses from fake instruments of profit, may make the sort of consdered loans they were once taught to make to help local interests with people they trusted.

2009 Jan 05 10:24 AM