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About forcing banks to lend...

I read an interesting post here yesterday (or was it the day before?) about "forcing banks to lend" and am curious to see if anyone has a similar feeling to myself.

As we all know, any well run bank will (or should) study the risk before lending, look at the return, and then take a decision.

With the current "crisis" many central banks have dropped rates to try and kick-start the overall lending process agaain... but  "Have we got it all wrong?" 

I ask the question because when talking to a client bank recently, one of the senior staff  commented that with rates now so low, they were in some ways less inclined to lend. The basic gist of the argument was if I can lend at 5% or 6% I might take the risk, but if I'm only going to get 2%, why take the chance.

I realise the argument has many flaws, but the underlying logic does beg some questions.



Comments: (1)

A Finextra member
A Finextra member 25 November, 2008, 10:25Be the first to give this comment the thumbs up 0 likes

It was me, guv.

As I mentioned, at the end of the day we have to trust bankers (and I mean those in branches, not those people at the 'centre' who have never been lending managers) , who have been trained to lend, to make those decisions.  It helps nobody to be lent money, for a business or in personal life, to support a project that will fail - they just end up in a mess (as we have seen).

It was interesting to see how RBS has announced it will honour facilities for the next 12-18 months, at current prices and at current levels.  What I also saw elsewhere (and indeed in the press release on the RBS website) was that there is a rider, i.e., that such commitment is subject to risk profiles not changing.  That is really the only reason why overdrafts should be called in, or repriced, anyway, so what did the announcement really achieve (except that it seems to have been misreported as unconditional in some quarters).  What the announcement says is that, unlike in normal circumstances, the overdrafts are committed (subject to the rider).  Overdrafts have alwasy been 'repayable on demand', although how many times that clause has been invoked outside of deteriorating risk profiles is open to debate.

I also saw something that said HMG is to establish some kind of panel to review bank lending practices.  This fills me with dread and would crystallise the spectre that I raised - that of untrained people second-guessing the banks (and even possibly overriding them).

We got into this mess because banks, for whatever reason, lent unwisely.  Now we know this, we should let them rediscover their prudence and recitfy the issue of overindebtedness, not force them to overlend to unprofitable businesses (and people).