11 August 2010
The missing lending infrastructure - and what to do about it
The fight back by the banking lobby, determined to cling to the status quo, seems to have begun in earnest.
First it was HSBC warning about the consequences of splitting retail from banking from speculative banking. Then it was Barclays setting aside 40 per cent of its investment banking income for bonuses, while threatening to leave the UK altogether.
The lobby’s first success was the appointment of Sir John Vickers, who has presided over a particularly pathetic period at the Office of Fair Trading, and a watering down of the terms of reference of his inquiry – they will look at competition rather than the goal of a more diverse banking system.
But now we are onto the next stage. This is not so much to rescue the reputation of the banks (that isn’t possible now, even for the lobbyists), but to make changing the status quo just too risky to contemplate.
Politicians are in some way playing the lobbyists’ game with their constant hand-wringing about small business lending. “There is no excuse for RBS not to loan to good British companies that are struggling to get credit,” said Stephen Williams, the Lib Dem vice-chair of the Treasury select committee.
The truth of the matter – and it really is time the political world understood this – is not that our handful of banks won't lend to small business. It is that they can't.
They
are no longer structured to do so. Their structures and attention remains
focused on the speculative economy. They have no systems capable of
lending locally; they have no local infrastructure that can give them the information
they need - just tickbox computerised forms that will refuse most deserving
small enterprise projects.
We are not being failed by our banks because of their laziness. We are
being failed by them because of the structure of their sector. They understand lending on assets, but they
can’t deal with lending on cashflow.
They understand big, but can’t grapple with small.
The constant exhortation, begging the banks to lend more, as if they could if they wanted, simply obscures the point and plays into the hands of the lobbyists.
But there is a bigger theme here. We are approaching the first 100 days of the new coalition government, and every day that passes makes it clearer how much our inadequate lending infrastructure stands between the coalition and so many of their policy objectives.
This is most obvious in terms of enterprise. As much as 48 per cent of UK business lending was to the property sector, according to Bank of England figures, fuelling the bubble. That was bad enough, but – since the crisis – that figure has leapt to 78 per cent (and that is over four years to March 2010).
It is urgent, if we are going to have an enterprise-led recovery – which is what the coalition expects – that we have a banking infrastructure capable of lending it into existence.
But this lending infrastructure is horribly absent also in a range of other coalition objectives, from renewable energy to the Big Society.
So here is a quick cross-departmental aide memoire for the government if they are going to be the first UK government to get to grips with this problem effectively for the past century, when we first allowed the banking oligopoly to emerge.
- Break up the banks in public ownership: retail banking needs to be separated, because otherwise it will always be dominated by the speculative economy. But the banks in public ownership also need to be divided into their original parts to provide the local and regional lending networks we need.
- Set up new national institutions: we already have commitments for a Green Investment Bank and a Big Society Bank, but we also need a Postbank and much else besides. The shape of the Big Society Bank is now reasonably clear, but the Green Investment Bank remains hazy – and green energy investment is now being held up waiting for policy to emerge.
- Launch a Community Reinvestment Act: the CRA is Jimmy Carter era legislation in the USA which forced the banks to reveal where they were lending money, and – if it wasn’t where they were taking deposits – they were expected to funnel lending into those areas via a new generation of community development finance institutions. A UK CRA would provide a similar funnel of lending capital into intermediary lenders, known as Community Development Finance Institutions, mainly in inner cities.
- Encourage Mission related Investment: philanthropic institutions and quangos like the Big Lottery lend a small proportion of their funds, but keep the rest stashed away in big banks. It is time they started investing this money somewhere more useful in line with their stated mission. Big Lottery grants are just a pinprick compared to the impact it would have if the Big Lottery, and similar bodies, kept their money in ethical local lending institutions.
- Launch a series of local pension funds: these would be invested in local infrastructure, as they are in other countries. Pension funds invested in low-cost housing, for example, are a good deal safer and more reliable investments than they would be invested in the stock market, especially as we hurtle towards the point where oil starts reaching its peak production levels.
- Use local authority reserves. Local authorities have a problem now, which is that they can no longer lodge their reserves in Icelandic banks or the money markets. Some have begun to use it to provide mortgages for their staff, a safe and reliable investment (as long as they don’t make them redundant). Others are considering using it for local business loans, but they need intermediary agencies to make this possible.
What emerges from this brief list is an encouraging thought. Despite the current national mood, the money for lending is there, but it is largely doing nothing – or nothing useful. It could be doing something useful, if not for the good of the nation then for the good of the neighbourhood.
The problem isn’t money. It is infrastructure. We need a huge influx of new institutions capable of funnelling this money somewhere where it can do some good and get a reasonable, reliable return.
We also need some system to encourage this process from the government. For that we need some national institutions. But most of all, we need ones with local knowledge. In short, we need financial institutions like insects – reliable and imaginative – not the great lumbering dinosaurs we have at the moment.
Share this:
Connect with us
Recent blog posts
-
Our high streets have life in them yet
8 February 2012
-
Time to save the Sustainable Communities Act
7 February 2012
-
Stripping Sir Fred - a monumental irrelevance
31 January 2012
-
Why slow finance will happen here first
31 January 2012
-
Is it time for spirituality in business?
25 January 2012
-
Why competition is the main issue
10 January 2012
-
A revolution you can eat
6 January 2012
-
Retail has its own squeezed middle
5 January 2012
-
Remembering John, Richard and David
22 December 2011
-
How to avoid the peregrination in the catacombs
21 December 2011
Comments
22 Aug 2010 at 06:04
O'Dea
Your effort is good and will assist in improving the world. However, all is in vain unless "out of control consumption and population" is brought back to sustainable levels. It is practical to introduce a declining population in all countrys and even rduce economic GDPs in all countrys. Only vested interest groups oppose this humanitarian path.23 Aug 2010 at 11:56
Lars Hektoen
Where are we now? Nef has been very specific for years now about what needs to be changed, but what is really happening? Governments all around Europe, and also in the US do nothing to stimulate local banking. They save Citibank and let Shore Bank fail, that's reality. Many countries have the small alternative banks up and going, but we are still waiting for the real breakthrough, which, by the way, has to come from the bottom and up. But if the mess created by the financial crisis couldn't make that breakthough happen, what will?28 Aug 2010 at 18:06
Mateus
zaujimavy clanok, mam k tomu aj materialy a reporty.04 Sep 2010 at 18:02
ian greenwood
What about a floor on savings interest rates to encourage savers and together with this a diversion of part of all new money issued by the commercial banks, such as by charging for it at the base rate with an ET return as elaborated below? As NEF have suggested to me, the credit money part could be ring-fenced. It seems timely that the conservatives and policymakers need to be reminded of this. Could both of these measures be brought in with a return to enable the Green New Deal - substantial eco-funding to save energy -such as by super-insulation which could bring wall losses down to 1/10 and window losses down to 1/5 especially overnight - for example in the long cold winter evenings/mornings or when buildings are unoccupied.. SEE the paper below prepared for the Max Fry Economists one of whom said this was "good": Paper FROM THE EXISTING HIGH-PRESSURE WORLD of finance, it would surely be desirable to have a mechanism for automatic diversion of part of commercially-created money if it could be for anti-inflationary, long-term climate protection needs . The credit creation system needs restarting in a better way and offers the perfect opportunity, now that instability issues are being discussed. So a credit creation charge might be a timely way to achieve a stabilising flow of revenue from the top-heavy, most-profitable world of high finance. We would then need a mechanism for efficient distribution, suggested below - fairly funding projects directly via an Equitable Environmental Tax . In Australia the GST is at 10%, Canada 5%. In the UK VAT had been brought down to 15%. But none of these countries have a mechanism that allocates ring-fenced funds against climate change. Meanwhile congestion caused by cars has declined little since the credit crunch. They are still using up the limited fossil fuels that China and India will soon be even more rapidly eating into. And sea levels will more rapidly rise. We need substantial budgets to cope with these while restraining only some frivolous spending. So energy transition and climate change adaptation measures could both be massively assisted by the simple means suggested below. Part of it has already got muted praise from Whitehall and by the Bank of England. Earlier STEER (ETI) was supported as an option by the Earth Policy Institute in the USA - a lead author in Earth from the Air (!) photos that brought matters sharply into focus. For example the decline in value of trade received (from increased volumes) for those bottom 50 countries with weak currencies (50% drop in value 1990-2000). This started me in my search for solutions to currency value problems that could attend to climate. We have embarked on a book that must be out soon which NEF may wish to support, hopefully a short TV series to follow. In it we are describing how currency value has been at the heart of a series of global problems: from global terrorism to inadequate protection of the agricultural and other land turning to desert, to our own starvation of funds that should have more automatically gone towards infrastructure costs (otherwise increasing taxation) that would protect the roads from congestion. The ordinary man, the business man or woman and the teenager struggling to make sense of the world will read this book! So should government, policymakers and academics! It offers the mechanism by which the Green New Deal can be helped to reality instead of another forgotten report or another set of failed measures like EEM and EIM in the USA. In it we will show that a simple diversion (charging at the base rate of interest for any new money) amounts to a lot less than half of currently-created credit money that has been and will in future without this simple alteration continue to be a source of extreme profit to banks - even in a slowdown - and inflation and impoverishment for the rest of us. This can be used to assist the introduction of an ET a fundamental alteration to the means of distribution. Each year would add a similar increment – stabilising after all new money is charged for. Because it would be adjustable it would help to restrain inflation. By making the money flow automatically and ADJUSTABLY to investments, increasing as rates go up, rather than consumption (direct to projects and with an equal return [i.e. 5+5%=ET] to projects in producer nations) rather than through government or bureaucracy, we may have the magic bullet partially described above, to help everyone including banks, insurers, re-insurers and EMPLOYERS/EES, without affecting existing production. SUMMARY: Briefly put, the VAT would be brought down to 10% and the EET or ETI brought in alongside at 10%. The offset needed to protect the vulnerable from the effects of that tax (amounting to 2.5% net increase in UK) would be diverted from banking as mentioned in the first few lines above to help simplify the myriad of taxes AND GET A CLEARER FUNDING STREAM: by sending the base rate on any new money to the public purse via the Central Bank or by re-allocating at source to super-insulation THE BORROWERS TO BUY HOUSES WOULD GET EXTRA RING-FENCED MONEY TO DO THEM UP WITH LARGELY EXTERNAL INSULATION - turning them into GAINT HEAT STORES. The new diversion would help the implementation of a ‘dream agreement’ for Copenhagen or its successor and allow fast-tracking of Building Make-overs WITH A MORE EFFICIENT WAY OF FUND DISTRIBUTION EVEN IF ONLY FOR MATERIALS – energy enveloping and energy detailing with a proper subsidy. Part of this can be via existing bank systems – in diverting some of the value of the free money they are in the habit of receiving, they can have the responsibility of allocating part of their free money to super-insulation and cost-effective low tech renewable energy inter-seasonal storage see MakeItZOne.org (- in the UK) analysed and with flow charts available from us. Contact Ian.Greenwood +44 (0)121 449 0278 @STEERglobal.org PS In addition to the above top-down approach now being sent to the new government, we are now undertaking a bottom-up approach to demonstrating climate and re-skill initiative which makes budget action also urgent - see MakeItZone.org and please request our business plan summary. Please contact with offers of any help – It’s a big job and there is, as yet no funding stream, since grants and funding have been cut all round and loans just add to the business burden which new start-ups and struggling businesses can ill afford. We need direct revenues from created money for these purposes to get this pilot going which could lead to two other suitable sites getting underway (the owners of which we will help if they so wish). Once each of these projects get going, they need no more state funding. Thanks. [Paper based on one prepared for Max Fry Conference participants – In May 2009]06 Dec 2010 at 21:33
Paul Halfpenny
I've been thinking about conducting some research which parallels your point 6 - how local authorities in particular use their reserves, and whether or not any of them are taking a PRI or MRI approach to investing. Do you know of any research which has been undertaken in this field to date? I've come across quite a lot of info on the use of PRI or MRI within charitable foundations, but little or nothing relating to the public sector. Many thanks08 Jan 2011 at 11:03
jorjun
A newly successful banking sector requires a period of de-consolidation, that's all. Too-big-to-fail as a notion caused much of the current mess, and the correct response is more market competition: simple, retail-only banks. There is no easier business model than banking, the software package required to run a robust banking database is actually not all that expensive. The only way I could imagine a state involvement to effect positive change is in facilitating the creation of brand new British retail-only banking chains.