So What's Changed For Banks Now?

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So I've explained how they decide whether to lend to someone or not, and how the cost of the credit is linked to the expected number of defaults for that particular product. 

Some people, for one reason or another, borrow money with the intention of declaring bankruptcy, or borrow money with no intention of paying it back. These people are morons and/or thieves as far as I'm concerned. Just as the costs of uninsured drivers are added to the premiums of honest, insured drives, so the cost of the morons is added to the cost of borrowing. That is, unfortunately, the kind of world we live in and shouldn't come as a surprise.

Other people are determined to honour their debts but get into trouble and simply cannot. 

Now, as we go into a recession and the odds of people defaulting on their debts increases - more people get into trouble, so the risk of lending increase. With the Bank of England reducing interest rates and the Government badgering the banks to 'pass on the cut', what this means is that in order to decide who gets access to the now much smaller pot of credit, they increase the credit score required by customers to be approved.

Let me say that again: The less profit the banks can make on a loan, the less risk they're able to take. The long and short is a massive reduction in the number of people who can get credit.

Because businesses are also suffering from this new risk averse - and cash strapped - banking system, so more businesses are going under, which increases the risks to the banks, so they lend to fewer and fewer people. 

If you make the banks start lending to the same number of people they did in 2007, they can only do that if they put up their prices significantly and the taxpayer gives them the Capital to lend out in the first place. Our Government, no matter how much they've put up so far, cannot singlehandedly replace the old international wholesale money market.  Low volume, low risk, high profit business is what the banks are focusing on now. It's how they'll make the sums add up. 

Once the banks are fully recapitalised they will no doubt try to increase the volumes. Barclays says this is going to take 2 years.  If the economy is growing again by that time then the risks of lending will begin to drop, either widening the pool of people who can get credit or reducing the price of borrowing, or both at the same time. 

The thing to remember, next time you're calling for Bank Nationalisation, is that the banks make money from lending to people. They love doing it. If they could lend without destroying their business, then they would. If we nationalise them, we're basically just saying, "do the stupid thing anyway, we'll pay for it"

It's also worth noting that a loan guarantee scheme would be, in effect, a subsidy for the banks. Nice to see the Tories returning to their (very) old protectionist ways. 

What I'm saying is that as crap as it sounds, we really might just have to live with this for now. We have to adapt to the new availablity of credit, whether we like it or not. It's going to be horrible but eventually it will end, and eventually we'll start growing again. And then we'll be very glad we didn't get carried away and bring down Capitalism. Assuming, of course, we don't bring down Capitalism, and I mean 'we' as in the British not 'we' as in the Liberal Democrats. 

Thanks.

This blog is closed and has moved to http://Charlottegore.com. See you there!