Can government lending targets for banks work?
Banks are making big profits once again and the pressure is increasing to force them to lend more so that the rest of the economy can bounce back too. However it seems that while profits are going up lending is not. Many businesses need money lent to them if they are to be able to invest in order to grow so damaging a potential recovery. Yet at the same time we do not want our banks to dig themselves back into trouble by lending too much again. Will government lending targets really help either extreme case?
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Will stop protective lending
Banks are now in fear that they will lend to people who will not be able to pay back the debt. It is for this reason that small businesses and starting businesses send a code red to the banks. These small businesses may not have a high net worth, or much collateral for the loan. They have no proof of earnings and no guaranteed income. If the banks carry on giving these small businesses the red light what we will be left with is a protectionist policy on large corporations. Only they will be given the loans in order to expand their own capital gain. This is a protectionist method and the Government needs to intervene so that small businesses can compete in the market place.
What does the colour red symbolize? Danger! Danger is what small businesses are. They are risks, very high risks. After all the vilification the banks received for the credit crisis are you surprised that they are automatically rejecting those who pose such high risks?
Will help provide more jobs
If the banks are made to give a set amount to small businesses, small businesses would have a chance to flourish. This will result in more jobs. This will help our current epidemic of unemployment, currently standing at 2.46 million [[http://www.statistics.gov.uk/cci/nugget.asp?id=12]]. In turn, as people attain jobs from these small businesses, they will have more disposable income. They will use this disposable income and this will increase the opportunities for small businesses to set up. This will then create a cycle of more jobs, more money, and more opportunity. The Government needs to encourage and force banks to lend to small businesses in order to spark this cycle.
This is the thing. A loan will only help a successful business become more successful, per chance. But why should a bank lend to new starters who have no proof of even a chance of success? The chance is minimal in a post-recession market. People are still being very cautious with their disposable income. The banks have to assess the small businesses ‘chance to flourish’ and it is not the banks fault when evaluating that we are post-recession and flourishing is not likely. It is for this reason that banks are refusing loans and it is for this reason that the Government should not impose target loan amounts to banks.
Will stop the profits getting into the hands of the few
Currently, one of the only ways for a small business to get their hands on the money they need to expand their business is to give up shares in their company. This is called equity investment. However, the problem is that equity investors know that they are in a strong position. Small businesses want to expand their business and they need money to do so. Banks are unwilling to give out the loans, so an equity investor is one of the only options a small business has. This means that in negotiations, equity investors can be very shrewd and demand a higher percentage than if banks did lend to small businesses. This will mean that small businesses will not make all the profit, but instead will be forced to share a large percentage of it; with someone who already has a backlog of wealth. Saved money is useless to the economy and so the Government should set targets for banks lending to small businesses in order to keep the money from getting into equity investor hands.
The reality is that equity investors will not be content with earning the menial savings account interest that banks currently offer. They too would see this as dead money. Instead, they would take their profits and buy equity in other small businesses. Surely this will be good for the recession. Equity investors will keep on investing because they are getting part of the business out of the transaction. This means that many small businesses would prosper. Surely this is good for society? Yes, small businesses do not want to give away a percentage of their business, but expansion would lead to greater profits and so they would earn more than if they tried to enter the business world alone.
Proposals to banks cost small businesses money
Getting a loan for a small business is not as simple as one may think. It is not simply a case of walking into a bank and asking for the money with a decision being made there and then. Small businesses have to draft, re-draft and triple draft their proposals. They have to detail their current financial balance sheets, their plans and detail the financial forecast for their business. In order to put across the best report to have a greater likelihood of securing a loan, small businesses have to hire accountants to create these financial documents. This costs a vast amount, not to mention the time to attend meetings. The figures can be astonishing; Simon Green quoted his estimated spending at £8,000[[http://www.bbc.co.uk/news/business-10841243]]. The result; no loan with no reasons given as to why not. Banks need to have a target of lending to give to small businesses in order to ensure that banks are not merely turning away small businesses based on the risk without even looking at the work presented to them.
Exacerbated lending lead to the problem in the first place
There is a reason why banks are not lending to these small businesses. It is because there is a small likelihood of them being able to pay the loans bank. Given that the bankers received such scrutiny from the media over their ‘reckless lending’ how can we know argue that they should give money to people that we do not know if they will be able to pay it off or not? We should let the economy grow naturally. Eventually the memory of the recession will die and the banks will feel free once more to lend to small businesses; of their own accord.
Yes, exacerbated lending did lead to the problem in the first place, but it is for this reason that the Government would set a target. A target implies that banks are to try and reach that level of lending, which means that Government do not want exacerbated lending, but enough lending to keep the economy going. The Government will draw in expertise from the Financial Services Authority and the market regulators and various other economists to draw together sensible levels of lending which are beneficial both to small businesses and the economy at large.
People should save if they want a business
The problem is that people have become too reckless with their money. In the boom period, people did not save to buy a house; they merely went to the bank and took out 110% mortgages. Surprise, surprise with that attitude to money they were not able to pay the mortgage repayments. We need to reinstall into people the art of saving, work for what you get. Small businesses should save their gross profits and use those to expand naturally.
Demand on loans is down
You cannot place loan targets for banks if there are simply not enough applications for loans to reach those targets. HSBC has released statistics showing that the demand is down. Overdraft usage is down 45%, loan applications are down by 20%. So even though the bank approves nearly 70% of all business applications[[http://www.guardian.co.uk/business/2010/aug/02/hsbc-rejects-government-lending-targets]], the figures make it look like lending has reduced. But in percentages, the banks are lending businesses the same amount of money as they have done over the last three years.
The reason why demand is down is because confidence in the banking system is low. People know that they are unlikely to succeed in getting a loan. Small business owners are aware that they face tremendous accountancy fees for proposing a loan which they probably will not attain, or if they do, at a very high interest rate. If the Government put in place targets, small businesses would feel more confident in applying for loans and would therefore apply more. This would mean it would be possible for the banks to reach their Government set targets of business lending.
The Coalition has conflicting ideas
One of the many drawn backs of weak Coalition Government is at the forefront here. Mixed messages. The Coalition wants to condemn banks for their reckless lending. They want to change the procedures so that such reckless lending will not happen again. At the same time they are trying to get banks to lend money to high risk businesses and once again, at the same time they are asking banks to build up their liquidity. In April 2010, the Financial Services Authority was drawing up liquidity requirements for banks[[http://www.fsa.gov.uk/pages/Library/Communication/PR/2007/134.shtml]], once again more targets. Only a few more months down the line and they want to set up loan targets. The banks really cannot do this all! There are differing objectives here and the Government need to sort out which avenue they wish to go down before they start talk of issuing targets to profiteering banks like HSBC.
The Banks have no incentive to meet targets, and the Government has no means of enforcement
When the banks recently made fools of themselves by building a massive price bubble in property and other assets, the thing that was proved is that in these circumstances Government has no choice but to bail them out.
The banks have been largely permitted to walk away from their obligations to the Government and the public, secure in the knowledge that they will never be allowed to go bankrupt. They therefore feel free to do whatever they like to maximise their short term profits again.
At present, Banks can borrow at a fraction of a percent, and make a massive profit lending at rates often extending to double digits. They have no need to make large volumes of loans or take even modest risks to make their profits. Even when they would be prepared to lend to a small business for example, the rates and conditions are so punitive that the banks are more of a problem than a solution.
At present the Government does not have the power to force the Banks to act in the public interest. The only thing that would make the Banks sit up and take notice would be if the Government committed to running a substantial Nationalised banking sector in competition with the private Banks. The clear message would then be "If you do not perform, do not assume that we cannot do without you".
What do you think?