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Instead of lending to small businesses, bankers are lining their own pockets. And yet we look the other way
How hard it is to explain the banks' effortless escape from any painful punishment or real reform to prevent them crashing the world economy again. Today's Financial Times reported the banks have escaped the modest Basel III requirement to hold 7% reserves against their lending. Instead they use risky "hybrid capital and other debt-like instruments" as surety – and the casino plays on, destined to crash again. Meanwhile, the banks are failing to keep a modest pledge to foster growth by lending more to business.
Historians will wonder why the last government and this one approached banks with such extreme trepidation. Or why the public did not demand more reparation as people lost homes and livelihoods. Or how Bob Diamond escaped lynching after telling the Treasury select committee that "the time for remorse is over" while pocketing £27m in pay and bonuses. Although historians may conclude it suited this government to use shrinking the deficit as a cover for permanently shrinking the state, it suits no government to let the banks stunt growth. One answer is the enduring legacy of the 1980s, a dangerous acceptance of iron economic laws devised by the same economists, forecasters and credit-raters who failed to see the bubble or predict the banking cataclysm.
This week I talked to small businesses (SMEs) suffering from the banks' refusal to lend at reasonable rates. Project Merlin was supposed to ensure banks stop withholding funds. But as the Guardian's Nils Pratley argues, Project Merlin is "a woolly piece of work" that talks not of hard targets but of "desire" to see lending rise, with "expectations" in lending "based on the desires of customers". When it emerged that in the first quarter the banks lent £2.2bn less than these "expectations", George Osborne said the pay of bank executives would be linked to their lending, but there is no text, no system with remuneration committees. Their pay cut relies on proof of "customer demand".
So small businesses were dumbfounded when the banks tried to claim there was only "muted demand". Steve Brittan, of BSA Machine Tools Ltd, runs the kind of business that needs to grow to rebalance the economy away from finance. He makes customised machine tools mostly for export, employing 30 people in Birmingham. Between contract and delivery can take six to 12 months, so he needs and always used to get, working capital to finance the time from deposit to final payment. This is bog standard, non-risky everyday lending. But he can't get it, nor the bank's letters of credit that were once no problem. "Banks have changed," he says. "There used to be a manager based right here, knew us, understood the businesses. That's all gone. Now a junior guy who knows nothing and isn't allowed to make decisions sends it to head office who compute it – and say no." At his local chamber of commerce he sees the same everywhere. A very small manufacturer down the road had his interest rate put up to 11.75%, "so he's taken to boarding cats to keep his first business going".
Simon Topman, another Birmingham manufacturer, on the local enterprise board, tells the same story of the local Barclays branch manager who once knew everything that moved and breathed around Birmingham's jewellery quarter: "Now it's just a head office formula. If someone has a thumping good idea, the answer is no. You'd have to go to venture capitalists and they'd charge thumping interest. Banks don't do proper business banking any more."
Pauline Osbourne only wanted a £3,000 overdraft for her micro food business. "Barclays knew me for years but they charged 16.99% interest plus £37.50 a quarter. I paid because I needed it right then." Some I spoke to were too anxious about bank retaliation to have their businesses named: one trying to expand her factory and hire six more people was turned down by RBS even though she had an official Enterprise Finance Guarantee. "Sounds great, a loan backed by government. But RBS – owned by us – wouldn't even accept that."
So much for "muted demand". Many said they wouldn't ask for a loan, for fear of triggering a "restructured" higher interest rate. A Small Business Federation survey found only 16% of members had asked banks for credit, perhaps because 44% who did were refused. Banks will only take property as a rock solid guarantee, withdrawing from financing business transactions. The result is that £2.2bn shortfall in lending the banks promised, when everything should be bent towards growth. The banks that caused the crash are an obstacle to recovery. The businesses I spoke to seethed with fury at banks' failure to lend at a reasonable rate, while pouring money into their bottom line and inflating bankers' bonuses.
UK Uncut ison Saturday protesting at banks in 35 towns and cities across the country. The group quotes the Bank of England's Andrew Haldane: he says UK citizens give the banks a £100bn annual subsidy in free insurance and guarantees which, he points out, matches the entire NHS budget – an NHS now suffering cuts and 53,000 lost jobs. So citizens stand as insurers against the risks, without sharing the profits. The bank protesters will mainly be the usual good people, but the chambers of commerce should be out with them . So should all those denied mortgages, as Resolution Trust research this week reveals that home ownership is now beyond the reach of most 35-year-olds on middle incomes: it would take them 46 years to save a 5% deposit.
The political question is where does all that pent-up public anger go? Some is cleverly deflected against Labour by the Tories and their press – and echoed by the Lib Dems – creating the myth that Gordon Brown, not the banks, crashed the economy. Some is redirected against benefit cheats, even as unemployment rises. Some against immigrants. Some on mixed jealousy and awe in a twisted fixation on the lifestyles of footballers and stars.
True, bankers are detested but they remain a distant abstraction, sequestered in a private stratosphere beyond everyday understanding. The puzzle is why the politics of this moment fail to capture and express the shrinking pockets and dwindling opportunities of the many. The real fear that gripped all I spoke to was that the deficit hawks on the monetary policy committee would prevail and raise interest rates – at which point, many said, there would be a shocking torrent of business collapses. But so far, political torpor seems to have dulled the edge of national outrage.