Monthly Archives: December 2013

WHY THIS IS A CREATIVE MOMENT IN UK BANKING

It was an unusual alliance led by Lib Dem members of the House of Lords that made this possible. 

During the debates around the Financial Services Bill last year, they inserted a clause which would force the banks to reveal the geographical lending data – where their loans and mortgages were being made.

Eventually, the banks agreed to reveal this information down to 9,000 different postcode levels.  On Tuesday, the figures will be available.

The revelations look set to be embarrassing for the banks, but don’t let’s go over the top on this.  Nothing that is revealed will come as a surprise for those of us who have been following the issue of dysfunctional local banking – and it is to their credit that they are being transparent.

The issue is what we should do about it.  Because if the existing infrastructure is not able to lend to small business – and that seems to be the message – then we need an infrastructure that can.

It seems clear the direction of travel, now or later.  The big banks will pay for that new infrastructure, and will shape it, based on the money they are not able to lend to productive business locally.

The Americans have used geographical lending data since 1977, in their Community Reinvestment Act, to determine how much the big banks must pay to build a local lending infrastructure – of community banks and community development finance institutions (CDFIs) – to lend where they find it difficult.

This will replace the succession of measures we have had in the UK – Project Merlin, Funding for Lending – which have not persuaded the banks to lend more in the critical SME sector.

It is already clear that the banks will struggle against this.  Their fightback is already clear: they will say that Community Reinvestment Act (CRA) lending caused the sub-prime meltdown in the USA.

They must know this isn’t true.  The Federal Reserve investigated it and found that, actually, CRA-backed loans were half as likely to default than those loans made by institutions which had opted out of the CRA.

In fact, CRA lending was an insulation against financial meltdown.  And if you don’t believe me, read the findings:

E. Laderman and C. Reid C, 2008 ‘Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown’ Working Paper 2008-05, Federal Reserve Bank of San Francisco

So why are the banks peddling this nonsense, when they know it isn’t true – and when they operate inside the CRA framework themselves in their US subsidiaries?  Who knows.

But let me make this prediction.  Within three years, the UK banks will be happily operating a related system, financing a new local lending infrastructure – which can genuinely rebuild local economies.

And they will do so willingly and with conviction and pride, because it allows them to end the argument once and for all about whether they lend enough to SMEs.

It is also the most important policy move that we can make to re-balance the economy.  And it all kicks off on Tuesday – as long as people are forewarned against the disinformation about the CRA in the USA.

It didn’t cause the sub-prime crisis.  Quite the reverse.  Don’t let them get away with quite such a blatant reversal of the truth.