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How Do You Force A Bank To Lend?

Notwithstanding the complete ar*e the banks have made, at the macro level, of the world's finances, most bankers at branch level can probably still be relied upon to make sensible decisions about lending to viable businesses.  Whilst of course they can be subject to diktats from senior management at the centre as to pricing policy, generally speaking it's probably the case that a properly trained lending manager will be able to make decisions based on the facts presented to them, ie whether to lend or not, and at what price.

Having seen reports that ministers are considering forcing the banks to lend to small business (when they are doing just that anyway), it leaves me wondering how those lending decisions are to be made, and by whom.  Ministers and civil servants are not trained in analysing balance sheets, cash flow, bank account performance, etc.  It would be a recipe for disaster for us to assume that they could therefore make the decisions for those trained for years in the art (or science).  If Johnny's chip shop suddenly can't get a loan they want, or they don't like the price that's offered, are they going to be able to appeal?  If so, to whom and how?  Who arbitrates, and what makes us think that some bunch of government officials will be able to make a better judgement than someone in the bank who has been trained for years in the lending process?

If, against bankers' better judgement, they are forced to lend money at either too low a price, or to businesses that will in all probability fail, that isn't going to help anyone.  What that will do is a) fritter away the capital that is being put into banks - capital that is not only owned by existing shareholders but also now by the taxpayer b) prop up businesses that really shouldn't exist and therefore reduce the impact of what a recession usually does - which is to weed out the weak.  This will be to the detriment of the country in the years ahead, no matter how bad it looks in the short term.

The same, for that matter, goes for private individuals. In forcing banks to lend to business where their judgement is that they shouldn't, why would they not do the same for Fred Bloggs who wants a loan that they can't afford?  The Government would be setting a precedent with business that it surely would have to extend to the mortgage and personal loan markets - and possibly credit cards too?  Where would it stop?

Additionally, whilst it might be relatively easy to force such obligations onto RBS (assuming it ends up as a majority shareholder) it would be less successful with Lloyds (where it would be in the minority) and unsuccessful completely with Barclays and HSBC, Santander, etc. (ie those banks where it has no shares) unless it legislates.  If this is the case, then the unfortunate banks over which it can exercise power will forever be zombie banks, the receptacle of all dodgy lending, now and in the future.  The chances of the taxpayer ever being reimbursed for the investment would be practically nil in those circumstances.

HMG should of course 'encourage' banks to lend, but to do so responsibly.  They certainly should not step in to replace the commercial lending decisions made by the professionals by decisions made by a group of amateurs.  Don't forget that money lost through bad lending decisions costs the taxpayer directly from now on.  Wouldn't you rather leave those decisions in the hands of the professionals?


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