Community
Ockham’s Razor is one of the sharpest tools in the box of a journalist. The razor is a figurative tool, which identifies the truth as being the view that includes the fewest assumptions. The phrase “Just the facts Ma’am” sums up the implicit rejection of assumptions nicely.
Applying the razor to the challenge that authorities and regulators face in driving bank lending brings me to the observation that banks are not ‘economically useful’, they are only useful when the economy is already doing well.
Banks in many countries, including the UK, are not lending to small and medium enterprises, despite the government purchase of bank debt in some cases to fuel just such an activity and in spite of various regulatory pressures. When asked why they are not moving in the direction that the governments are pushing, the response is usually that they are simply diverting the money to other more useful places, such as into capital reserves. The requirement for increased capital is being imposed by the Basel Committee and compliance is undoubtedly onerous. However that does not address a slightly more fundamental issue at the heart of why banks are not lending.
Applying Ockham’s razor to the issue of why a bank would not lend, the simplest explanation would be that the bank does not think it will get its money back. Loans to businesses are risky because there is volatility in so many financial, social and economic indicators – the price of gold for example – that we cannot be very certain of anything, and that includes the longevity of small businesses. That is a reasonable position, as banks are not intended to make bad loan decisions (indeed that very activity got us into our current predicament).
So why do politicians think they should they lend? Because the level of risk is high for everyone, with uncertainty around everything from employment to the survival of some very big banking names. Right now gathering and sitting on cash is the safest thing to do, but it is killing people in economic terms. Taking the risk of lending money in this climate would be the equivalent of giving your umbrella to someone just as it starts to rain. It is not in the business model of banking to get wet.
So the banks take no risk, but in doing so they expose the truth of their value to the economy. They only lend when the economy is growing. Having brought it down, they have no way of making it grow again.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Hassan Zebdeh Financial Crime Advisor at Eastnets
08 October
Jelle Van Schaick Head of Marketing at Intergiro
07 October
Kuldeep Shrimali Consulting Partner at Tata Consultancy Services
Nikunj Gundaniya Product manager at Digipay.guru
Welcome to Finextra. We use cookies to help us to deliver our services. You may change your preferences at our Cookie Centre.
Please read our Privacy Policy.