To Lend or Not to Lend? The Dilemma Facing UK Banks

May 22, 2013   //   by Keith McDonald   //   Latest Updates  //  Comments Off on To Lend or Not to Lend? The Dilemma Facing UK Banks

Following our fantastic Q&A with FundTheGap, we were invited to contribute towards a video campaign featuring Tim Drayson, senior economist at Legal & General Investment Management.

This video response tackles a question that has lingered since the shocking revelation that banks had reduced their net lending in the second half of 2012 despite the introduction of the Funding for Lending Scheme:

Given the pressure for banks to build capital requirements while they are losing cash as a consequence of scandals, what will it take to boost lending?

Mr Drayson rightly suggests that the vast payouts from numerous scandals have proven problematic because this leakage from the system has removed funds that could have been used to secure banks’ capital bases without such a detrimental impact on lending.

UK banks are facing a dilemma. On the one hand, they’re under pressure to increase lending. And indeed, the Funding for Lending Scheme is designed to try and encourage the banks to pump out more credit into the economy. On the other hand, they’re under pressure to rebuild their capital base. Of course, that would mean reducing lending.

So how do we reconcile this tension?

Well, from the authorities’ perspective, what they want to see from the banks is both increased lending but also reduction in compensation within the banking community and that will allow them to retain more earnings and put that aside to rebuild their capital base.

From an economics perspective, we think the gradual pickup in lending will be quite beneficial for the economy. There’s certainly no need to return to the reckless credit growth we saw pre-crisis. We want to try and avoid those kind of imbalances reappearing in the UK.

‘Ripe for the Picking’

CBI Ripe For The PickingA new guide released this week from the Confederation of British Industry (CBI), Ripe for the Picking, aims to raise awareness of the numerous sources of finance still available for small businesses. These range from peer-to-peer lending and crowdfunding to trade finance and venture capital.

It also identified the growing presence of challenger banks such as Aldermore and Metro, which has helped to expand the availability of commercial finance and even to reprise an element of competition between lenders. Lending at Aldermore exceeded a quarter of a billion pounds in the final quarter of 2012.

Peer-to-peer lending platforms, which act as a conduit between investors and businesses, have become increasingly confident in their claims this year that they can make serious inroads into what remains a considerable funding shortfall. Funding Circle, which now processes over £10 million in loans per month, has ambitiously said that it could provide up to 20% of all SME funding within as little as five years.

And Chancellor George Osborne has said that any extension to the Funding for Lending Scheme will be weighted towards business lending and away from residential mortgages, where it has driven down rates to record lows.

Is there finally light on the horizon for the UK’s small businesses? There’s no time like the present to find out.

See the full economic outlook for May here.

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