Why Ritchie and Willy etc are wrong to worry about the banks

It\’s one of those things that the idiot lefties love to scream about.

Wah wah, the banks won\’t lend to companies. But we are in Anglo Saxon capitalism, not Rhineland. We rely upon markets more than the Germans do and less upon banks:

In September, UK companies raised £17.3bn of debt through the bond market, compared with less than half that amount in the same month in 2011 as renewed confidence in the eurozone and a backdrop of low interest rates attracted inflows of cash from investors hunting for returns.

It\’s entirely possible, sensible even, to have a debate about which of these two systems is better. But to complain that the banks don\’t lend to companies when in our system the companies borrow elsewhere is simply ignorant nonsense. What matters is that companies can borrow. Which they can.

17 thoughts on “Why Ritchie and Willy etc are wrong to worry about the banks”

  1. Let me see if I’ve got this straight:

    1. Bankers dished out loans like smarties to people who had no hope of paying it back because lefties were complaining that poor people couldn’t get loans.

    2. Said bankers go cap in hand to govt when said poor people start to default and banks’ financial position is about to collapse.

    3. Lefties complain that bankers are evil capitalists and govt. are in bed with evil capitalists.

    4. Govt. rein in banks and commit them to responsible lending practices.

    5. Banks adopt policy of responsible lending and only give loans to those who are able to repay.

    6. Lefties say this is unfair and banks should lend money to all an sundry.

    How am I doing so far?

  2. Sounds good so far Henry. Add in a little bit about politicians requiring banks to hold more money while at the same time complaining that banks aren’t lending as much….

  3. Tim, you need a finer analysis here. Publicly-quoted companies can indeed raise money on the capital markets. It’s one of the main reasons for flotation. But private companies can’t. And we have a LOT of small and medium-size private companies. The moans are about the lack of lending to these smaller enterprises.

    Not that I’m necessarily suggesting that banks should be lending more to them, mind. I’d rather see more equity financing and non-bank forms of lending. But that of course means people who have money being prepared to take risks with it – which at the moment seems to be the last thing they want to do.

    Tim adds: The piece was really about PE. So bond financing is not restricted to publicly quoted companies….

  4. The suggestion that 1 is because LEFTIES is bonkers. Subprime arose because there was a gigantic credit bubble, leaving banks with more money than the entire set of people and companies who could afford to pay it back had any interest in borrowing.

    Hence, banks were desperate to create ways to lend out more money, so clever people with spreadsheets spent their lives trying to design ways in which people and companies who couldn’t afford to pay it back could be lent money without the predicted consequences appearing terrible.

    Now, *that* is certainly driven in part by government policy. But the government policy in question was Greenspan trying to stop the bubble collapsing – nothing to do with Bill, George or Gordon demanding banks lend to poor people.

    On point two, losses on subprime residential mortgages in the UK have been sod-all. The serious bailouts were RBS (leveraged buyout of an investment bank) and HBOS (commercial property). Northern Rock and B&B were subprime mortgages, but they’re small, done, dusted, written off and largely irrelevant.

    4-6 + Martin’s point are more or less accurate.

  5. Addendum:

    1b. Labour govt set up Financial Services Authority and give them the responsibility for overseeing the Financial Services industry. This includes making sure that Banks don’t over-leverage themselves and maintain a gearing in line with Bank of England regulations. Banks now overseen by people less qualified than themselves in matters financial.

  6. @Tim, sure bond financing is not limited to quoted companies, but equity financing pretty much is. Until you are big enough to have a liquid market for your shares you have to rely on current shareholders or the mates they can sell to. Outside the PE/VCworld such people simply don’t exist, and PE/VC tend to be very choosy about who they get their own funding from. Can you really buy into a PE fund with less than €100k, or approach one for start-up capital without a bank prepared to provide substantial overdraft facilities?

    Things are screwy when money is so cheap but in such short supply. I blame the central bank.

  7. Could you provide some figures showing the much greater reliance on non-bank funding of UK companies than European ones?

  8. Henry Crun (above) wants to know how he is doing. I’d say (to paraphrase Mr Grace of Grace Brothers) “You’re doing very well”. But I’d add another item:

    Everyone deplores TBTF implicit bank subsidies. But at the same time everyone wants the money in their bank accounts to be 100% safe. Now where do leftie plonkers (and rightie plonkers come to that) think the money comes from to insure those deposits? It can only come from taxpayers. And that amounts to a subsidy of banking.

  9. Henry, you missed another one – the one that seems to exercise almost everyone:

    – people complain that house prices are too high, whilst simultaneously

    – complaining that mortgages are too hard to get and too expensive.

  10. “The suggestion that 1 is because LEFTIES is bonkers.” Clinton and the Democrats are not lefties, eh?

    Repeat after me: Community Reinvestment Act.

  11. Ralph – so we need to remove that particular state subsidy then. Perhaps an insurance scheme available from insurance companies to cover losses for those who are worried about their money instead.

  12. As a venture capitalist pointed out to me the other day, in the UK, we use banks for working capital, and rely on equity markets, private investors and the like for the main capital required by firms. Equity, rather than debt, makes more sense. Given the riskiness of startups, this makes sense even when credit conditions are looser than they are now.

    If this government really wanted to encourage wealth creation, it should scrap capital gains tax, hack away at red tape and so on. Chiding the banks is a waste of time.

  13. Banks provide a lot of seed capital in the form of secured overdraft facilities; secured against assets such as house equity etc. The problem comes when this seed capital is being used to run the company on a day to day basis and not being repaid. Any retail banker will tell you this is a danger sign, as the business is not making a profit.
    At this stage do they:
    1. Allow more borrowing, ‘to tide you over’ or
    2. Stop the business there and then, calling in the guarantees/security?
    What the bleeding hearts see is ‘honest working class small businessmen and traders’ having difficulty in continuing to live off an overdraft.
    Their answer is, apparently, to increase the debt and make the mess worse when it all falls down.
    At the moment the bankers do nothing, as this puts off the evil day as, Micawber-like, they wait for something to turn up.
    I have always found that if you make a deal with a bank and steadily pay down a loan/overdraft that they will look kindly on an other deal to expand a business. The big failure is not to steadily repay a loan.
    I cannot count the number of times I’ve heard a tradesman with a couple of mates & a van moan that the bank won’t lend him just a little more to secure/finish a job. Rainbows and pots of gold.

  14. Yes, saying to the bank I need more overdraft/loan in order to stay afloat without specifying where increased income will come from, tad likely to be turned down. Government gets annoyed that people are turned down and demand the banks lend more…. without knowing all the risks. Media don’t help.

  15. “Community Reinvestment Act.”

    Made bugger all difference to anything, and anyone who believes it does is a crank. The banks invested in subprime because it was profitable, not because of the CRA.

  16. @ john b
    NO it *did*
    Most sub-prime loans only existed as a consequence of the Community Reinvestment Act.
    @ Ralph Musgrave
    NO – the little guy who is not capable (because he isn’t given the tools to do so) of analysing a bank’s creditworthiness wants all licensed banks to be a safe place for his money. The big guy can pick and choose to get the best risk-adjusted return. Pre-Darling bank deposit guarantees looked after the little guy – now they protect the greedy rich guy. We should go back to a limited guarantee for the little guy but not for the rich and banks will have an incentive to act prudently in order to attract rich clients.

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