Although interest rates have gone through the roof, and the consequence for mortgage borrowers has been widely reported, there has not been the rise in bank bad debt provisions that should logically follow from this.
That absence has puzzled me, but an article in the FT this morning suggests an answer:
Plend, a peer-to-peer lending platform published research recently suggesting the number of people who feel “locked out” of the financial system jumped by 40 per cent last year, as banks cut back on riskier lending: more than a quarter of the UK population now feels financially excluded and the figure is nearly half for black and minority ethnic communities.
It would seem that the reaction of banks is to simply deny credit to those who they think might default, forcing them out of the mainstream banking market.
There has been a boom in the 'buy now, pay later' market as a result.
I suspect the secondary, extortionate, lenders are winning too.
But we should not ignore the cost to society.
We already know that banks withdrawing their physical presence, and even ATMs, from communities is having a cost in terms of access to banking, not least for cash-based businesses (and there are still some) and the elderly who are reluctant to use online services.
What this latest trend - and it is markedly upward according to another FT article published in April - suggests is that this crisis is being exacerbated for many already in the margins of financial access by banks deliberately withdrawing from the markets serving them as well.
The cost will be significant. People without access to credit lose resilience. Crises cannot be managed, or can only be managed at considerably greater cost. In a world where savings are little known to many in our society (the bottom half of income earners have few of any significance between them) this means those already vulnerable are being exposed to very much greater risk.
This trend is so familiar. Just as the government is trying to tackle its own debt issues (which do not really exist) by forcing the private sector into debt, so the private sector is managing its debt crisis by forcing the most vulnerable into the arms of the worst types of credit, or simply leaving them to go without when that has a massive impact on their wellbeing. We are witnessing collective denial at cost to those least able to afford it.
Many years ago, when discussing this issue, I suggested that it was the job of the government, through local authorities, to address this issue. I suggested an emergency loan should be available to anyone, with a simple application process and a cap on the total possible facility, with loans only being provided for essential spending. But vitally, I suggested low-interest charges should be offered because repayment should be via the benefits or PAYE system, with simple adjustments being made to allow for that (and I do not think that beyond the boundaries of the design of either system).
Nothing like that has ever happened, of course.
Has the time come to talk about it? When the absence of access to affordable credit is doing real harm in society now, surely it is time for the government to tackle the issue? Is that really too much to ask for?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Slightly different point, but I listening to an interesting podcast on the differential effect of QE and QT on bank balance sheets.
In short, QT does not simply reverse QE. There is some hysteresis.
QE did not just involve banks increasing central bank reserves, but also some investors selling government bonds and depositing the proceeds with banks as largely uninsured “on demand” funds. And cheap liquidity for banks meant term borrowings by banks declined. They just did not need longer term and more expensive finance. To put it another way, the mix of assets and liabilities on the balance sheet changed in favour of short term funds.
But QT tends to involve cancellation of central bank reserves without reduction of the “on demand” deposits or replacement of the term borrowings.
The upshot is a systemic increase in risk. And the banks are vulnerable if the “on demand” deposits are withdrawn.
I don’t know if this is just the US or the UK too, but it sounds plausible to explain some of the recent bank failures.
The FT makes this same point this morning
QT would make current US style banking failures much more likely in the UK
Do Credit Unions not supply this function? I save some of my (meagre) resources with the local one because of my belief that they provide the service you suggest. I admit I don’t know a lot about them. They are probably too small to meet the need though.
In the U.K. you are right
Elsewhere they do
On the narrow point about provisions.
Banks know that there is trouble round the corner but the rules about provisioning are quite prescriptive (letting bankers use judgement is rarely a good idea). So, we will see trouble….. but probably not until the end of this year. In the meantime banks are hoping to make hay while the sun shines (pay zero to depositors, receive 4.5% on their deposits at the BoE).
On the issue of credit provision I agree we do need to do better and banks just won’t…. but my starting point is “what world are we in if so many need credit to get by”.
Provisioning rules have changed
Anticipated losses can now be provided
It is odd that this is nit happening
Let me see what I can find out.
Certainly anticipated losses can be provisioned…. but how changes to that anticipation are made is tricky. HMRC, shareholders, regulators, executives all have an axe to grind.
Why should a government- or council-administered loan charge interest at all?
Once upon a time there were Budgeting Loans (for big cost items) and Crisis Loans (for small items). The Coalition saw those off the books in 2011.
https://www.gov.uk/government/news/changes-to-crisis-loans-protecting-the-vulnerable
But the very basic premise of such Loans was that Boots-theory Economics as interpreted by the State in the most detrimental way possible (https://en.m.wikipedia.org/wiki/Boots_theory) was a sensible way to help. They weren’t really.
If you are paying back loan X from your benefit you can’t save, to avoid having to take out loan Y. The loans were never enough to pay for good quality items, we in the Jobcentres and Benefits Agency offices had to scour local small ads for local second-hand prices to limit the amounts we paid – and wondered (sarcasm) why the claimant turned up next week for a Crisis Loan “having lost her purse” – in truth, needing more money to feed her family.
If benefits were paid at a thriving rate, if the “authorities” had a Job Guarantee scheme, if we really meant what we said when we vowed to eradicate poverty… but that would mean having a government showing empathy, wouldn’t it?
Interesting piece by Andy Verity (BBC), titled “Interest rate ‘rigging’ evidence ‘covered up’ by banks”. This is a reference to Central Banks, not commercial banks. The core of the argument is here:
“At the height of the 2008 financial crisis, when bank lending had almost ground to a halt, central banks around the world urged calm. But my investigation reveals evidence that, behind the scenes, they were pulling levers to restore calm artificially – measures which would later be ruled to be against the law in the UK”.
Do you have a link?
BBC, Andy Verity: https://www.bbc.co.uk/news/business-65635243
Thanks
The report today is this one:
https://www.bbc.co.uk/news/business-65635243
But that follows on from previous reports like this:
https://www.bbc.co.uk/news/business-60561679
That is quite compelling
I suspect nothing will happen
But nine people are in jail
This suggests an immense miscarriage of justice. It always seemed pretty obvious that those who were jailed for non-trivial periods, were acting at the direction or at least indication of their management. This suggests that central bank’s and governments were involved as well.
This matters for many reasons, not least that people’s personal lives were destroyed.
I think it is widely known that the BoE encouraged LIBOR ‘low-balling” during the crisis.
That was a panic/ emergency response to real risks of a complete meltdown. I don’t think this was necessarily bad…. indeed, probably a sensible thing to do. Don’t know why the BoE is so coy about what they did.
This is totally separate to libor rigging by banks for commercial advantage that occurred outside of the crisis period.
Nobody in jail for the former… only the latter.
It just goes to show that banks are here to help themselves first really rather than anyone else.
Rather I think this thread that banks fail as examples of free enterprise.
“Rather I think this thread demonstrates that banks fail as examples of free enterprise.”
Actually, I think that is an important point we may overlook; but it would help if I could post comments without the reader labouring through my slapdash keyboard errors.
Banks don’t even fit into the free enterprise model
Therefore we should finally give up pretending; and construct a system that reflects reality. The commercial banking system has failed. Period.
It has, I agree
What about this idea from Yanis Varoufakis?
https://www.yanisvaroufakis.eu/2023/04/09/time-to-blow-up-the-banking-system-project-syndicate-march-2023/
The idea that interested me was the one about doing away with the banks control over the means of electronic transfers, this bit: “Imagine that the central bank provided everyone with a free digital wallet, effectively a free bank account bearing interest at the central bank overnight rate. Given that the current banking system functions like an anti-social cartel, the central bank might as well use modern digital, cloud-based technology to provide free digital transactions and savings storage to all, its net revenues paying for essential public goods. Freed from the compulsion to keep their money in a private bank, and to pay through the nose in order to transact using its system, people will then be free to choose if and when they wish to use private financial institutions offering risk intermediation between savers and borrowers whose monies will, however, live in perfect safety on the central bank’s ledger.”.
This is an issue whose day is coming
Just a query that you may have answered before, if so, I missed it.
What happens when the BofE pays interest on a CBRA? Is it merely paid into the CBRA, or does the Commercial bank then pay it into some other account it owns?
Remember money is just promises to pay
It is not ‘a thing’
The central bank pays interest. Dr interest cist, Cr bank CBRA
The Bank gets the interest. Dr CBRA, Cr interest
The fact it then spends the interest makes no difference to the CBRA entry. It always remains in that account.
I tried to open a business account for a Partnership with Barclays the other day. I didn’t need a capital investment, but they told me that their small businesses diary was closed. They’re simply not lending at all.