Banks DO have an obligation to taxpayers

by Ed Bowsher on 04 August 2010  |  6 comments
Tweet

A right-wing columnist says that UK banks are under no obligation to lend, their only obligation is to shareholders. I think that's total rubbish!

Simon Heffer’s latest column in the Telegraph has really got me going. Here’s the passage that made me cross:

“The Chancellor of the Exchequer, who I appreciate is still learning about economics, for example over the weekend said that the banks had an ‘economic obligation’ to lend money. What does he think he’s playing at?

“The banks have no such thing as an ‘economic obligation’ to do anything. They are private companies with shareholders, even if in a couple of cases some of these shareholders happen to be the taxpayer. Their only obligation is to them. If lending money makes commercial sense, they’ll do it. If it doesn’t, they won’t.”

It’s extraordinary, isn’t it? Hasn’t Mr Heffer realised that the banks’ stupidity was a major cause of the economic crisis? Not the only cause, but a major cause. What’s more, the banks were bailed out by the taxpayer. Some wouldn’t be in business were it not for the taxpayer, so the banks are under an obligation to give something back. That’s why levies on bank profits are justified and why it’s wrong to say that banks’ only obligation is to their shareholders.

Too little lending or too little borrowing?

So if lots of sound businesses want to borrow, the banks should do their best to lend to as many of those businesses as possible.

But that, of course, begs a question. Are there lots of businesses out there wanting to borrow so they can invest in future growth?

I suspect that the financial crisis woke some businesses up to the dangers of carrying too much debt.

As a result, many businesses may now be focused on reducing debt rather than borrowing to invest in growth. In other words, we’ve experienced a balance sheet recession which is very different from most conventional recessions.

It’s an interesting question and I don’t know the answer. I’d love it if someone conducted some research on this. Are there thousands of businesses out there that want to borrow and can’t? Or are bank managers twiddling their thumbs waiting for potential borrowers to walk in through the door?