Political indecision is making the banking crisis worse

29 05 2009

The news  that British banks are lending less, non-financial companies paid back a net total of £2.3bn to big banks last month, points to what well may happen next in the recession, ie good businesses finding it harder to get loans or overdraft facilities. Anecdotal evidence suggests this is already happening. I was at a round table discussion with a dozen other IT CEOs and Vince Cable, the Lib Dem’s treasury spokesman,  last week in which all agreed that it was getting harder to get money from the banks. Cable himself  said that banks were holding on to their worst customers, to try to stop them defaulting on their loans, but were reducing their good customers in order to rebuild their asset balances. Other figures released yesterday from the British Bankers Association showed that mortgage lending fell to its lowest level for 8 years in April, confirming that potential house buyers are being deprived of credit as well.

It is clear that the banks are doing their utmost to hold on to as much cash as possible. This is because many are basically bankrupt and only being held up by government support and guarantees. They are desperately trying to rebuild their balance sheets as fast as possible, essentially by hoarding cash.

What does this mean? Firstly for businesses that find their overdrafts being curtailed it will lead to cash flow problems and possible business failure. This will lead to further unemployment and deepen the recession.

Secondly it means that the indecisiveness shown by the UK government and others in the face of the credit crunch has come back to haunt us. Two things could have avoided the problem we now find ourselves in. The banks inflicted with toxic debt could have been fully nationalised and made therefore instruments of government policy, in which case they could have been forced to lend. Alternately they could have been fully exposed to the market and forced to write off their losses. This would have led to bank failuire on a huge scale, but good banks would have emerged which could now be lending properly. Instead we have the worst of both worlds, bankrupt banks which are desperate to rebuild their balance sheets to offset the huge toxic debt that most still have.

The collapse of large banks would have been a shock to the system, but the alternative is now years of credit starvation and consequent misery as they try to struggle out of the hole they are in. Indecisiveness at a political level has once again made a bad situation worse.

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