Cory's Insights – Wed 2 Dec, 2015
Seven years after the crisis, Britain is still addicted to the drug of debt
It is interesting what the Bank of England is doing with its loans. While extending the Funding for Lending Scheme (FLS) which supplies banks with free money (this is nothing new as we are seeing this around the world) the country is now focusing on lending to small and medium sized enterprises. An issues that the US has faced over the past few years as money has been held by the bigger corporation and not been trickling down. If money can get to the small and medium sized companies this could help spur growth.
Another interesting fact is that the article brought up is that banks are far more willing to lend to individuals rather than corporations. With the “cheap money taps due to gradually turned off over the next two years” we will have to see what the fall out is…
It’s seven years after the financial crisis and the banking industry is still in receipt of state support – support that will be available for two more years, and perhaps for longer.
The Treasury and the Bank of England have decided to extend their Funding for Lending Scheme (FLS), which supplies banks with cheap money with the aim of keeping the supply of credit flowing.
What ought, in theory, to be the scheme’s final outing will be very specifically targeted at lending to small and medium-sized enterprises (SMEs). This is a sector which is still struggling to obtain the funding it needs at a time when lending to other sectors has largely recovered.
The Bank says that things are improving, and its figures bear that out. But not quickly, and the growth in small business lending pales by comparison to the growth in consumer lending. The expansion of the latter is starting to cause concern, with the Bank’s chief economist, Andy Haldane, fretting about personal loans. He says they’re picking up at a rate of knots.
Britain has long nursed an addiction to the drug of debt that it’s never really addressed and the growth in unsecured lending is an indication of a return to bad habits. Given that Mr Haldane and his colleagues are engaged in the unenviable task of walking an economic tightrope, it’s no wonder that he’s getting twitchy.
But consumers are not, as yet, shooting up with the sort of wild abandon they exhibited in the run-up to the crisis. And, as Investec’s Philip Shaw points out, it wasn’t so long ago that we were still talking about the need to make more credit available.
SMEs present an entirely different challenge, and perhaps we should be concerned that the Bank still feels that FLS is necessary, even though the cheap money taps are due to be gradually turned off over the next two years.
The proportion of loans to SMEs being refused by banks remains high, and while alternatives to traditional lenders have been growing, fuelled by the internet, their impact has clearly been insufficient.
Despite their protestations to the contrary, banks appear far more willing to lend to individuals than to businesses, to the economy’s detriment. FLS treats the symptom, but the Bank and the Treasury would to well to consider the cause, at least if they don’t want to be in the position of announcing yet another extension in two years’ time.