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Banks: Lending

Volume 711: debated on Wednesday 17 June 2009


Asked By

To ask Her Majesty’s Government what further discussions they have had with banks regarding their lending to businesses and house buyers.

My Lords, at the 2008 Pre-Budget Report the Government announced the creation of a new lending panel which meets regularly to monitor lending to businesses and households. The lending panel is supported by the home finance forum, the consumer finance forum and the small business finance forum, which consider mortgage lending, consumer credit and lending to businesses. In addition to these meetings, Ministers and officials meet a wide range of stakeholders, including financial institutions, to discuss matters relating to the economy, including lending.

My Lords, I thank my noble friend for that Answer. Does he agree with what the Deputy Governor of the Bank of England said last week? It is worth quoting. He said that unless banks increase their lending,

“recovery might end up being anaemic, at best”.

Also last week, the Prime Minister said that the banks have agreed to lend an additional £70 billion above what they had lent the previous year. But those are promises. In practice, there is ample evidence that the banks are still not lending as they should. I am sure that my noble friend is aware that in the case even of small business loan guarantee schemes, matching funds are required. In housing, where the banks previously lent 125 per cent, they are now—when prices are lower—demanding at least 40 per cent. Is the panel doing anything about that? After all, at the moment, all that we have are promises. What action do the Government or the lending panel agree to take in the event of the promises not being kept?

My Lords, I agree with Mr Paul Tucker’s comments. It is essential that the availability of credit is increased to support lending and economic activity, and that indeed is happening. It is happening particularly for larger companies, which are being supported by the capital markets through equity raising and bonds, but also for smaller businesses. The Government have done a considerable amount in this respect to encourage the process. The lending agreements that we have with Lloyds bank and Royal Bank of Scotland commit those institutions to lending an extra £14 billion and £25 billion this year. HSBC has committed to lend an extra £15 billion, Barclays an extra £11 billion and Northern Rock up to an extra £5 billion. These agreements with those banks that have entered into the extended credit guarantee scheme and the asset protection scheme are legally enforceable. They are monitored on a monthly basis and I regularly meet the chief executives of banks. The week before last I met the chief executive of HSBC; last week I met the Abbey National and this week the Co-operative and Nationwide.

My Lords, does the Minister not recognise that the Government’s own plans to raise some £900 billion in the gilt markets will inevitably force up interest rates, adding to the burdens on those businesses that are able to obtain loans, and therefore reduce the speed of recovery?

My Lords, I am afraid that the noble Lord misdirects himself. If he looks at the evidence, he will see it suggests that there is considerable confidence in the gilt-edged market. I now have direct responsibility within the Treasury for the Debt Management Office, a very professional unit that continues to fund our needs and requirements in an entirely practical way which is not damaging to interest rates. Therefore, we are not squeezing out the availability of funds to business and to private sector borrowers.

My Lords, the Minister paints a pretty rosy picture of the increased levels of lending by the banks. Is he aware that in many cases the banks require from existing small business customers much higher levels of security and higher fees which, given the economic situation, those small businesses are unable to find? These businesses are therefore not able to roll over their loans. Will the Minister speak to the banks, particularly those in public ownership, and ask them to address those problems as well as the global quantum to which they are committed to lend?

My Lords, as I indicated to my noble friend, I have regular meetings with the chairmen and chief executives of our major banks, and of course I discuss this issue. The total cost of borrowing to businesses has been drawn down as a consequence of much lower interest rates and the positive effects of the Bank of England’s quantitative easing programme. However, we have seen a widening of margins and increasingly demanding terms around collateral and covenants which significantly reflect the fact that banks are being more prudent now and moving away from the somewhat reckless terms they offered prior to the crisis. The noble Lord, Lord Newby, cannot have it both ways. We want bankers who are not only sensible and prudent but who recognise that they need to support their customers. I and the Government are absolutely committed to ensuring that that happens so that this economy can recover as quickly as possible.

My Lords, my noble friend did not mention a meeting with Northern Rock. Newspaper reports indicate that it is likely that Northern Rock will be sold. Would it not be beneficial if he had a meeting with Northern Rock and they talked about perhaps using it as the experimental base to try to advance lending both to people seeking to purchase a home and also to businesses as well?

My Lords, what evidence is there that the policy of quantitative easing is actually helping to ease banks’ lending, or is it the case, as is widely suggested, that much of the cash is going to overseas banks, and much of the rest of it is going to our own banks for the understandable purpose of reinforcing their own balance sheets?

My Lords, the impact of quantitative easing—a policy which is being followed by central banks in other countries, including the United States of America—is very evident in the lower interest rates now being charged on new medium and longer-term fixed interest rate debt. So it is having a very beneficial impact on the flow of credit. Whether the gilts and bonds that are acquired under quantitative easing are acquired from domestic owners or foreign owners matters little because if it is a foreign owner the funds have to be repatriated into sterling and are available to provide reserves to the banking system and support lending activity.

My Lords, we have heard an awful lot about lending and borrowing but not very much about repaying. It strikes me that we have a whole generation who have got used to the idea that they can borrow money willy-nilly but they do not have to repay it, and this is why we have got into such financial trouble. Is it not time that we changed the culture and made people realise that you borrow money and then you repay it?

My Lords, I could not agree more with the noble Countess. That is at the heart of good lending and good borrowing activity and it is a culture that we want to see restored to our banks—to see those banks in the hands of competent, prudent individuals, rather than the reckless and feckless behaviour that we have seen from some of our bankers in recent years.

My Lords, the Government launched the enterprise finance guarantee scheme with a great fanfare in January and told us that it was worth £1.3 billion. But this week in another place the Government said that the loans offered under the scheme totalled only £230 million and we do not know how much has actually been taken up. Does this mean that small firms do not need the finance, or is this another government scheme that has proved to be ineffective?

My Lords, at the heart of the noble Baroness’s question there is a very interesting point about whether, when studying credit creation and extension, we are looking at issues of inadequate supply or decreased demand. I think that the reduction in demand for credit is consistent with lower economic activity—that is what I would expect from my business background—as businesses harbour their cash resources more carefully, cut back on investment and hold less stock in ratio to sales. So I think that there is a demand feature at work. The noble Baroness, Lady Newby, also asks about the EFG scheme.

I am sorry, my Lords—the noble Baroness, Lady Noakes. I do apologise. I’ll get back to reading my brief. I do not normally use my notes but on this occasion I think that it is probably right to. The EFG scheme has already extended £445 million to eligible applications from over 4,000 firms that have been granted or are being processed and assessed; 2,855 businesses have been offered loans totalling £271 million. That is real help now for British business to help us get out of this economic crisis that is affecting the globe.