This news is not a substitute for a proper reorganisation of the banks but it will be popular with those outside the City. The banks should be pleased that they have been let off lightly. However, the attempt by the government to pusuade the banks to enter into some sort of agreement to lend more to aid the recovery, is incoherent nonsense and will have, if implemented, the reverse effect. It is like telling an alcoholic that part of his drying out programme is to drink more. For an economy which has hit the buffers because everybody borrowed too much, borrowing cannot be the way to get back on the track.
The banks’ position is, as I understand it, that there is not a great demand (good) and that they will lend only to businesses where the risk is judged to be commercially viable and within the boundaries of prudent banking. That is very good. Under no circumstances whatsoever should the banks allow themselves to be forced back from this essential base. No business can be founded well on borrowing. It must be founded on investment. Once up and running, with a clear and achieved business model which delivers profits and has the cash flow to finance borrowing, then maybe. The banks will say yes if it looks good. That is right.
There is a case for having more and smaller banks with regional connections, offering the facility to help small businesses to raise investment capital without borrowing and thereafter to smooth their cash flow. It is these and other structural defects in our over centralised banking system, dominated by giants too big to fail, now so huge that they are too big to save, that have to be put right.
To assert that things would work better if these big financial conglomerates lent more is to proclaim that very few lessons have been learned about how we got to where we are.