Bank of England chief King slams ‘market failure’ in banking that has seen loans to firms fall £83bn since 2008

| February 16, 2012 | 0 Comments

By
Hugo Duncan

Last updated at 7:55 AM on 16th February 2012

The full scale of how the banks are still failing to lend to Britain’s desperate small firms emerged yesterday.

Despite a series of public promises from senior ministers and bank officials, lending to business has tumbled in every single quarter of the past three years.

Bank of England Governor Sir Mervyn King yesterday spoke out against the ‘harsh treatment’ of small companies which are still ‘suffering’ at the hands of the banks.

Difficult times: Sir Mervyn King's explosive comments about lending made a mockery of the Government's attempts to get banks to lend

Difficult times: Sir Mervyn King’s explosive comments about lending made a mockery of the Government’s attempts to get banks to lend

He said ‘market failure’ meant firms
are being starved of the funds they need to grow, create jobs and drive
the economic recovery.

The startling statistics emerged in
Bank of England figures showing that net lending fell by £10.7billion in
2011 – in other words, the banks received £10.7billion more in loan
repayments than they gave out in new loans. That took the total fall
since the end of 2008 to £82.7billion.

Sir Mervyn’s explosive comments, as
the Bank unveiled its quarterly inflation report yesterday, made a
mockery of the Government’s attempts to get banks to lend.

Critics called on ministers to force
part-nationalised Lloyds Banking Group and Royal Bank of Scotland to
supply small companies with the crucial loans they need to kick-start
the recovery.

It came as Sir Mervyn warned that the
economy faces ‘substantial headwinds’ and hinted that interest rates
would stay at historic lows of 0.5 per cent until 2014.

The Governor said Britain would
‘zig-zag’ between growth and decline this year as one-off events such as
the additional bank holiday for the Queen’s Diamond Jubilee disrupt
business.

How the Daily Mail have covered bank lending

‘We are going through an adjustment that will take a long
time,’ said Sir Mervyn. ‘I think patience is a quality I would urge on
all of us. We can’t expect to get through this quickly.’

Official figures published on Monday
showed that five of Britain’s banking giants missed crucial 2011 lending
targets set under the much-maligned Project Merlin deal with the
Government.

The banks – HSBC, Barclays,
Santander, Lloyds and RBS – lent £74.9billion to small businesses in
2011 compared with the £76billion promised under the Merlin deal. RBS,
which is 82 per cent owned by the taxpayer, was the main culprit.

But separate Bank of England figures
showed the picture was even worse because net lending – the amount
handed out to firms, less the amount paid back – in fact fell.

The Bank of England has unleashed a £325bn quantitative easing programme in order to prevent 'a worse recession than in the 1930s'

The Bank of England has unleashed a £325bn quantitative easing programme in order to prevent ‘a worse recession than in the 1930s’

Net lending by the five Merlin banks slumped by £9.6billion last year, while net lending by all banks was down £10.7billion.

‘It’s obvious that net lending by banks to businesses as a whole has fallen quarter-on-quarter through 2011,’ said Sir Mervyn.

The last time net lending increased
was in the final three months of 2008 when the collapse of U.S.
investment bank Lehman Brothers plunged the world into recession.

It fell by £875million in the first
three months of 2009 – meaning businesses paid back more than they
borrowed – as the global economy crumbled.

It has fallen every quarter since
then, with banks getting back £82.7billion more in repayments than they
issued in loans to business.

The lending drought has left
companies short of the funds they need to invest, expand and hire new
staff – a crisis highlighted by the Daily Mail’s Make The Banks Lend
campaign.

Small businesses are crucial to
Britain’s economy because they offer the best chance of creating jobs
for redundant State workers and the unemployed.

Calls: There are demands for taxpayer-backed Royal Bank of Scotland and Lloyds to supply small companies with the crucial loans they need to kick-start the recovery

Calls: There are demands for taxpayer-backed Royal Bank of Scotland and Lloyds to supply small companies with the crucial loans they need to kick-start the recovery

Lord Oakeshott, the former Lib Dem
Treasury spokesman who quit over the Merlin deal, said: ‘The Governor
got it right and the Government got it wrong on making the banks lend to
small business.

‘After the abject failure of Project
Merlin, it is time to set new lending targets for the nationalised banks
with the boot, not a bonus, as the reward for failure.’

Sir Mervyn urged the Government to
lean on Lloyds and RBS, which are part-owned by the taxpayer, to make
them lend. ‘For a long period I have pointed out that the Government
owns two of the biggest four lenders,’ he said. ‘If they own them, they
can do something about it directly.’

He added: ‘There will, however,
continue to be a problem for small businesses until the banking system
is really back in a healthy condition. That is something the banks are
working very hard to do.’

The Government’s latest attempt to
help small firms is through a ‘credit easing’ plan called the National
Loan Guarantee Scheme, designed to lower interest rates paid by small
and medium-sized firms by as much as 1 per cent.

Chancellor George Osborne is expected
to outline the details in the Budget next month. But with only five
weeks to go, none of the major High Street banks has formally signed up.

Filed Under: Latest Finance News

Leave a Reply

You must be logged in to post a comment.

Get Adobe Flash player