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Payback time for the banks

2010 August 6
by Paul Vallely

The banks are back in profit. In the first half of the year British bankers have made around £11 billion, and will be paying themselves large amounts in bonuses by way of a pat on the back. But all across the country small and medium-sized businesses are complaining that the banks are not lending, or are doing so at much higher rates of interest and with whopping “arrangement fees” slapped on. Banker-bashing is back in season.

The banks insist that they are lending billions to small businesses. The real problem, they insist, is that fewer firms are asking for loans, and when they do they want to borrow about a quarter less than they did previously.

What is the truth here? Apologists for the banks say they must be lending more because profits are up – and profits come from the fees people pay to borrow. But that is bogus; fees may be up because fewer people are being charged more.

Experts offer little help. On the one hand the Federation of Small Businesses says that bank lending to its members is down to £500m a month, nearly half what is was before the banking crisis. On the other hand one big bank, RBS, insists it is approving 17 of every 20 applications for small business loans.

What is clear is that the banks recovery is not down to investment banking and trading revenues, which have slumped in recent months. Nor has the money come from personal banking: private customers have been repaying overdrafts rather than borrowing – HSBC customers in the UK have repaid £33bn more than the bank paid out in new loans this year. The surge in profits comes primarily from lending to companies where fees are up, and bad debts down, thanks to the way the banks have made it tougher for businesses to get a loan.

In one way this is good news for the taxpayer. The public purse should swiftly recoup some of the £200bn loans we made two years ago to keep Lloyds and RBS afloat and save the wider economy from collapse.  But that should not be our prime concern. Our real focus should be on the common good. Loans to business are vital for jobs. The banks are only a means to an end in that.

The taxpayer has handed over large amounts of cash; we have funded loan guarantees and the printing of money. The banks have taken advantage of that to rebuild their reserves, reduce bad debts and raise extra capital through share offerings. In that they have focused primarily on their own narrow corporate self-interest rather than the needs of the wider community.

Nowhere is that more evident than in the way the banks are using these renewed profits to pay out large shareholder dividends and big money in bonuses to their staff. Barclays is to set aside 40 per cent of investment banking income for bonuses. At HSBC that figure is 24 per cent and it has announced – as if we should all be grateful – that it would have paid 35 per cent before the banking crisis. Such largesse is intolerable at a time when taxpayers, through cuts in public services, are paying dear for the fecklessness of the financiers.

There has been an ambivalence in the government response. The tougher lending conditions for small businesses have been the indirect result of the Exchequer’s insistence that the banks must provide more capital safeguards against loans which might default. Government ministers need to switch the emphasis on this in the two big banks the taxpayer largely owns.

They should also place a higher tax on profits for the other banks. They should adopt the US proposal for a new $30bn public bank to lend to small businesses. And they should consider laws to break up those banks who clearly think they are still “too big to fail”.  Now that it is clear that the banks are not about to collapse it is time to make them pay something for all the trouble they have caused.

from The Church Times

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