Crowding out commercial lending

A recent Oxford University report points out that banks’ lending to the property sector ‘crowds out’ commercial lending to companies. Usually we are told that government spending ‘crowds out’ private spending. That is a fantasy, but this report shows that the private banks creation of money actually has effects.

Although this is no real surprise it is worth emphasising: Money creation orientates the economy.

But having privatised and ‘contracted out’ money creation, if we are not to follow on the coat-tails of private banking for profit, then we ought to be getting our government to direct where the money creation is actually oriented. The, pretty much continual, property price increases are clearly a direct result of private banks’ lending into the property sector.

Two things follow:
The first is that to suggest that lending on property is entirely and completely unproductive is not true. Lots of improvement work results from new ownership. Some of this – possibly most – will be productive, giving work to local builders, or even owners themselves, who buy local-ish materials. So that gives the UK economy a little improvement too.

Second, the poor level of commercial lending to companies (itself usually secured on property but largely as a second charge with the mortgage supplier having the first) is a major argument against banking solely for profit. Property is more profitable and less time consuming.

Something different is needed. One has only to look at Germany to see that a selection of co-operative, mission orientated, not for profit banks is urgently required. They can be directed towards regional prosperity rather than profit – albeit they will have to cover their costs. But if they are embedded in the locality they will have considerable local knowledge. No longer would commercial lending be reliant on big banks’ remote offices where everything is done by algorithms.

So it is fortunate that the RSA, in the form of Tony Greenham, combined with the core management of the sadly now deceased Airdrie Savings Bank, seems to have got the bit between its teeth and is starting the formation of a growing network of new, local not for profit co-operative banks. They will take a few years to be formed – but they are coming!

An advantage is that once these are established, they will in all likelihood cause the outlooks of the big four banks to adjust to a new banking landscape and the big banks’ UK lending policies are likely to improve towards real industry – as the big banks have been found to in Switzerland, for example.

And in current government terms a new bank or two over three years is probably pretty quick…


  1. Simon Gray -

    Up until the 1980’s all British high street banking was local. Bank managers were part of the community. Bankers, Building Society managers, businesses and others talked to each other about their local needs and communities. Banks looked after the savings of locals and lent to local businesses and individuals.

    It was only post 1980 that banks withdrew from their local areas, started shutting branches and relied increasingly on technology to cut costs and as a result became remote sellers of various insurance products rather than a local resource.

    Just as there is a need for strong local politics, communities need a strong local finance resource to promote and stimulate the local economy. If Government wants to stimulate regional development then a good place to start would be the re-building of local investment and business development structures managed and run by local people.

    1. Andrew (Andy) Crow -

      And as you suggest, Simon, there is a space being created on the ‘High Street’ as the big six (or however many it is now) desert their traditional customer base for the more esoteric realms of what we tend to lump together and call ‘casino banking’. (Perhaps unjustly. I make no further comment on that)

      Local populations seem to regard ‘their’ own local branch closing as some sort of disaster. Personally, I say ‘god rot ’em’. Soonest gone, soonest replaced by banking services a local economy can benefit from.

      Monopolies and cartels lose their ‘Heineken’ characteristics and just cease to reach the parts….

      1. Peter May -

        Agreed up to a point but…. it takes a good three years to create a bank so there will be some waiting involved…
        And if you run a small business, life is much more difficult without a branch. Even if you can use a Post Office getting cash for floats is often troublesome and if your’e paying in there everything is a day late. If you have to use internet banking then the banks are able to swing responsibility onto their (business) customers for any errors or omissions – it’s never their fault because they don’t do anything except take their fees…

  2. Graham -

    Having been in Spain over the winter I’ve been astonished at the number of bank branches there are, even in fairly small towns/villages compared with here. I looked up the data once and there are far more per 100,000 population in Spain than UK. I know they may not be open every day of the week. Yet, Spain is supposed to be a poorer country. (their motorways are far better and quieter too!!)

    1. Peter May -

      I suspect that is partly because property taxes are less onerous – and probably commercial property less expensive? – making it more economically viable to have ‘part-time’ branches.

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