The Coalition tries to make lending easier — but to what end?

By Peter Hoskin
^{Follow Peter on Twitter}

The past couple of weeks have solidified one thing: our economy’s reliance on the Bank of England. Last week it was the announcement of yet more quantitative easing, making the biggest monetary policy ruse in our history even bigger. Today it’s the launch of this ‘Funding for Lending’ scheme, by which banks will be able to access cheap finance from the Bank, so long as they then pass it on to households and businesses.

The reason why Mervyn King and George Osborne want to implement this lending scheme is simple enough: they think that, now the banks have stemmed their pre-crash largesse, there’s not enough money filtering down to the borrowing classes — and that, in turn, is holding the economy back. I always thought that this graph, comparing the ‘rate of unsuccessful loan applications by small- and medium-sized enterprises’ in 2007 and 2010, captured it rather well. In 2007, they could barely fail to secure a loan. In 2010, it was a different story entirely:

And yet I do have doubts about the government’s continued insistence on freeing-up credit. They reside, basically, in a single question, that I’ve never seen satisfactorily answered anywhere (although perhaps ConHome readers can put me right on that), and it’s this: how much of that drop in lending is excessive on the part of the banks, and how much is a worthwhile correction after years of over-dependency on debt?

Even the very useful surveys published by the SME Finance Monitor add to the murk. Flick through their latest report, and you’ll see numbers which suggest that only 12 per cent of SMEs applied for loans or overdrafts in the first quarter of this year, and the majority of those (79 per cent in the case of overdrafts, 59 per cent in the case of loans) were successful. But, then again, might other businesses not be asking for credit in the first place, because they expect that the banks will withhold the money? The report puts the proportion of ‘would-be seekers’ — those who want finance but feel unable to ask — at 12 per cent.

Anyway, I could go on and on with more numbers and more questions. This is a doubt-laden post, but that’s my point: I’m not sure how much good these schemes will actually achieve. And I’m not sure whether the government does either. If any ConHome readers could enlighten me, I’d appreciate it.