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Will Banks Really Follow Through On Their Anticipated £190 Billion Business Lending Goal

by Jim ONeil on March 4, 2011

in uk banks

For the past ten weeks, the UK Treasury and the four largest banks in the region have searched for middle ground between letting market forces dictate business lending and nationalizing credit provision.

Ministers want the financial institutions to increase credit in support of economic recovery in exchange for a “responsible” approach regarding bonuses. In the upcoming week, an agreement between the parties, called Project Merlin, could be revealed.

It is expected that Lloyds, HSBC, Barclays, and RBS will commit to £190 billion in business lending during 2011, with a caveat. They will do so if it makes commercial sense. Interested businesses must convince the banks that they will be able to repay the money borrowed.

Though the money will be available, the lending of it will be at the discretion of the bank regarding whether an applicant represents low risk.

That being said, it is a bit unclear how this practice differs from the current one. Some believe that banks will behave differently if they have to admit their past bad habits and promise to change. Others believe that business, particularly small business, lending will continue to decrease because banks have already swung far from past recklessness.

The reason for the caveat is that independent shareholders of each bank, as well as taxpayers, will not support lending to a business that cannot afford to repay its loan. Lending simply to meet targets is like throwing money away, a practice that led to the 2008 financial crisis. The four banks would need to be nationalized if the chancellor expected businesses to receive all of the money.

Ministers are aware that banks cannot be coerced into lending. Therefore, they are encouraging increased lending by strengthening the relationship between credit provision and future bonuses. The link will be soft and may have limited impact.

Demonstrating lending availability is not equivalent to actually lending the money. Ministers hope that holding a bank chief executive accountable for loan volume will be enough to force a change.

broch ritsoneson

what do you want, honesty?

Donald

There are economic principles that encourage free market capitalism, which allow individuals to live in freedom and this has produced unprecedented prosperity for the most number people every time it has been tried. Quite a few people in the UK have a penchant for socialism, which needs government oppression to enforce, ensures scarcity for everyone except the leaders, and has proved to be, well…crap I say

teddy

Would you prefer one of them to suggest an option where they don't want to help the economy?

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