Thursday, Dec 18, 2008
Banks will lend to anyone, but only the most reckless would borrow in this environment
Times: Alistair Darling aims to guarantee business lending
The Chancellor is considering a national lending scheme under which the Government would guarantee new lending to businesses of all sizes as one of his leading options. If past loan schemes are followed, the Government would cover most of the risk on each loan, possibly up to 80 per cent, and the bank would bear the rest. The taxpayer could be faced with a big bill if companies defaulted, as some certainly would. The default rate of firms involved in government loan schemes since 1981 is 28 per cent.
[CalculatedRisk says: The problem is partially that banks have tightened standards, but also that loan demand has fallen sharply (not many companies are looking to expand or invest right now). Guaranteeing lending might loosen standards, but I fail to see how it encourages companies to borrow]
8 Comments
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1. drewster said...
Found this on Calculated Risk, whence the above comment.
2. paul said...
Isn't this a form of printing money?
3. fjcruiser said...
if the lending is not guaranteed 100%, banks wont do it specially if the default rate is high and likely to rise.
4. Kruador said...
@paul: any lending is a form of printing money. The private banks have been 'printing' far more money in terms of new loans every year than the entire stock of cash money in circulation. The current stock of cash money is around £50bn. The stock of outstanding bank loans is 50 times bigger at £2,500bn (2.5 trillion).
Data from Bank of England:
http://www.bankofengland.co.uk/statistics/fnc/2008.htm
http://www.bankofengland.co.uk/statistics/abl/2008.htm
The idea is that loosening standards will make actual interest rates lower, which encourages borrowing. However, the problem is largely that companies can't make interest payments on current loans; borrowing more does not solve this.
5. it_is_going_with_a_bang said...
So having just lectured banks on how bad lending has caused this 'problem from over there', the fix apparantly is to lend completely recklessly to save your political ar5e.
?
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