Monday, 1 December 2008
They don't know what they're doing: Bank Lending
There has been much Press coverage over the weekend of pressure being put by Government onto the UK banks to encourage them to lend to small businesses. Peter Mandelson has styled himself a business champion (communists always do that, don't they?). Other ministers are 'cracking the whip' etc. Also there is speculation, probably true, that there will be a Banking Act in the Queen's Speech that will enforce banks to lend to smaller businesses.
And yet, for all that, Banks have been lending to small businesses. In fact, according to the British Bankers Association, £1 billion more than last year in the last quarter.
And this is despite the Banks being in total financial hock to either the Government or Foreign Sovereign Wealth Funds. For example, RBS has to pay back the Government preference shares at 14%, can't pay its executives what it likes and can't pay shareholders a dividend. Therefore the management rightly want it to be very cash generative to get rid of these onerous conditions.
That the new CEO, Hester, has decided to follow the Government mantra on mortgage repossessions and small business lending, reflects the 'secret' calls from The Prince of Darkness. After all, he owns 58% of RBS now and can call the tune.
My prediction is for a very difficult time ahead, now that the Government has its sticky mitts on the banks, it will interfere. And given that Government ministers know nothing about economics, incentives etc. it will be bad news all round. As a result many more small businesses will go bust and pension funds will suffer from low share prices and dividend payments.