Why banks aren’t lending

I had a few calls yesterday to talk about what’s going on between the Chancellor, Alistair Darling, and the banks. Oh yes, and Peter Mandelson was in there somewhere.

It was all to do with their bigwig government meeting yesterday, where the government was giving banks a grilling about why they're not lending enough to small businesses.

The list of attendees at yesterday’s meeting in fact included bankers:

• Stephen Hester, Chief Executive, RBS;
• Eric Daniels, Chief Executive, Lloyds Banking Group;
• Paul Thurston, Managing Director, UK banking, HSBC;
• John Varley, Chief Executive, Barclays Bank;
• Peter Sands, Chief Executive, Standard Chartered;

and, for the government:

• Alistair Darling, Chancellor;
• Lord Mandelson, the Business Secretary;
• Baroness Vadera, Minister for Competitiveness, Small Business and Enterprise;
• Lord Myners, the City Minister;

as well as some senior folks from the Bank of England.

As I wasn’t in the room with them, I had no idea what was said, but here’s my fly–on–the–wall view:

Chancellor: “Why aren’t you lending?”

Stephen Hester: “We are.”

Chancellor: “Oh no you’re not.”

Stephen Hester: “Oh yes we are.”

Chancellor: “Not, not, not, not, not.”

Lord Myners : “Stop being silly Alistair. Now then, you” – pointing at Stephen Hester – “I own you. Why aren’t you doing as I tell you?”

Stephen Hester: “I am.”

Lord Myners: “No, you’re not.”

Stephen Hester: “Yes, I am.”

Lord Myners: “No, you’re not.”

Stephen Hester: “Am so.”

Lord Myners: “No, you’re not, not, not, not, NOT!!!”

Lord Mandelson of Foy: “This is getting us nowhere.”

Turning to the bankers, the dark pools of Mandelson’s liquid eyes brim with fury. “If one of you does not explain why lending is so difficult right now, I’m going to suck your blood until your eyes pop out and your hearts stop beating.”

The bankers turn pale with fright.

Lord Mandelson: “I’m waiting”, sucking in a tight rush of air between his sharpened canines.

Peter Sands: “OK, let me try to explain.”

The other bankers breathe a sigh of relief.

Peter Sands: “So you know some banks almost went bankcrupt last year”, he states, pointing sideways to Stephen Hester and Eric Daniels, “well that was because they had no capital left due to money in the wholesale markets drying up, whilst their lending book was too large to sustain their liquidity.”

Baroness Vadera: “Pardon?”

Peter Sands: “OK. There are four issues here. Access to money, reserves of money, the likelihood of future losses and a lack of demand. These four issues are the reason why we have a lending issue, as do all countries and banks of the world.”

Baroness Vadera: “Finally, someone who can talk sense. Please explain further.”

Peter Sands: “Firstly, access to money. After the collapse of Lehman Brothers last year, interbank lending became horrendously expensive. This is still the case with interest rates twice those of the Bank of England or worse. As a result we have difficulty getting funding cheaply and therefore have to maintain interest rates at a higher level than you would like or we would be lending at a loss.”

Chancellor: “That’s an excuse.”

Baroness Vadera: “Let him finish Alistair. Mr. Sands, you say there are four issues. What are the others.”

Peter Sands: “Thank you Shriti. Sorry, may I call you Shriti.”

Lord Myners: “Bit of a Shriti thing to do if you ask me.”

Chancellor: “Paul. Stop it. That’s not funny.”

Lord Myners glares at Alistair Darling and the atmosphere becomes quite tense ... until Peter Sands breaks the silence.

Peter Sands: “OK, so we have four issues. The first is the cost of interbank borrowing. The second is the requirement to increase our capital reserves. A key requirement of Lord Turner’s review of the banking system included the fact that banks must, by law, build up their capital reserves during good years to ensure they have enough capital during downturns, as well as a new and more challenging 'core funding ratio' of total assets to capital. This is also a feature of European legislation and recommendations, and so we cannot lend easily when we have to rebuild capital.”

Chancellor: “But we’ve given you £1.3 trillion of taxpayers money to do that. How much more do you need.”

Paul Thurston: “The total value of UK business lending right now is £350 billion, but if you look at credit cards, banks in Europe have a $2.6 trillion exposure to unsecured lending on credit cards alone.”

Chancellor: “Well, you’re not getting any more taxpayer’s money.”

Paul Thurston: “Urrmm ... we’re HSBC Alistair. We don’t have any anyway.”

Chancellor: “Oh yes. Peter, you were saying.”

Peter Sands: “So, access to money, the cost of money and requirements to increase capital are all key issues. Then we have this problem of lending.”

Chancellor: “Yes. That’s the problem I want you to sort out.”

Peter Sands: “OK. There are two issues there. First, demand. According to Stephen, there is no demand out there for loans amongst small businesses.”

Lord Mandelson: “That can’t be right.”

Stephen Hester: “It is Peter ... and Peter.

Lord Mandelson: “Lord Mandelson to you, mortal.”

Stephe Hester: “Yes Lord Mandelson.  We have actually started a campaign to create demand because, right now, we accept 85% of all loans applied for by small businesses and only turn away the ones that look too risky. In fact, we’ve also reduced our interest rate margin as well, from 3.21% in the first quarter to 2.95% in the second.”

Lord Mandelson: “So why don’t businesses want loans.”

Stephen Hester: “Because, like you and I, they are worried about finances and are hoarding their money. They are avoiding making investments and borrowing, because cash is king right now. In any downturn, this would be the case. Save, don’t borrow. That’s the mentality.”

Chancellor: “That makes sense. I mean, I’ve just sold my third home for that reason.”

Baroness Vadera: “Schhh, Alistair. You don’t want anyone to know about that.”

Chancellor (blushing): “Oh yes. Thank you for reminding me Shriti.”

Peter Sands: “OK. So, it’s difficult to get money, we have to reserve more, there’s no demand for loans and finally, if we do lend, we want to do it properly.”

Lord Myners: “What do you mean by that?”

Peter Sands: “Well, we got into this mess because banks lent irresponsibly. Therefore, we are lending but we’re avoiding unsecured lending. If someone comes in and wants to borrow a million pounds but only has a Ford Fiesta as collateral, do you seriously want us to give them the money?”

Chancellor: “Why not?”

Peter Sands: “Because they probably won’t pay it back.”

Chancellor looks quizzical.

Peter Sands: “And we have to keep our interest rates at a level that covers those who do default.”

Peter breathes a sigh of relief and concludes: “So there you have it. We are happy to lend and are lending at reasonable rates to those who can cover their borrowing needs.”

The other bankers give Peter a thumbs up and look happy about the discussion of issues. Paul Thurston whispers to Peter Sands: “why is it that we did all the talking when we’re the only bankers in the room who didn’t need government aid?”

Meanwhile, the Ministers have a brief word with each other and then Lord Mandelson says: “OK. We heard your excuses Mr. Sands. No access to money, increasing capital reserves, more likelihood of loan defaults and low demand for borrowing all makes sense. However, we’ve decided that we don’t like what we hear so we’ve decided to give the Bank of China a banking licence. At least, they’ve got money.”

Meeting closes and the minutes are issued with a bunch of weblinks that show this is a global, not local, issue. Now, there’s a real excuse.

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