Cheap shots at banks raise No 11's morale

12 April 2012

Alistair Darling's eyebrows have gone into overdrive.

They've been shooting up and down and in and out over the past few days as his brow furrows and frowns in displeasure at the behaviour of the banks.

His concern is the availability and cost of borrowing for small and medium-sized businesses: the banks aren't lending enough money, he thinks, and loans are too costly.

Mr Darling is right that the gap between the rates at which banks borrow and lend is unusually large at the moment.

And the latest figures show that net lending to British businesses is falling at an annual rate of 5.4 per cent.

But, as he knows perfectly well, there are four good reasons why lending to those bedrock businesses has collapsed.

First, lots of foreign banks that were expanding globally and lending enthusiastically to British businesses have retired to their home markets with their tails between their legs.

Their disappearance has taken a huge chunk out of the market. British businesses have therefore had to turn to the old high street lenders they used to rely on a couple of decades ago, but the gap is too big for those banks to fill.

Second, the credit crisis has ripped through those banks' balance sheets.

In order to rebuild them, they have to make a higher margin on new lending than they otherwise would.

Hence the large gap between borrowing and lending rates.

Third, we're in a recession. Most companies don't want to expand when the economy is contracting.

So the collapse in the amount of borrowing by businesses is the consequence not just of a shortage in the supply of credit by banks but also of reduced demand by nervous businesses.

Fourth, and most importantly, credit ought to be more expensive than it used to be.

After all, it was the banks' failure to price risk properly that caused the credit crunch: they were lending too cheaply without paying enough attention to the credit-worthiness of the people and businesses they were handing out money to.

And if credit is to be rationed, small and medium-sized businesses are bound to suffer more than big firms: lending to them is riskier because they are more vulnerable to recession.

The banks are therefore doing what everybody thinks they ought to.

They are behaving like the old-fashioned model of bank manager - the one who peered sceptically over his spectacles at anybody who came in for a loan and was reluctant to offer facilities to people or businesses without a solid credit history.

That kept the banking system stable but it also frustrated entrepreneurs' ambitions.

Mr Darling can't have it both ways. He can't expect the banks to show the prudence they have lacked in recent years and, at the same time, to lend as freely and cheaply to small and medium-sized businesses as they have done in the past. But he knows that perfectly well.

The impressive eyebrow performance notwithstanding, he's probably being disingenuous: he's taking another cheap shot at the bankers, who have the merit, from his point of view, of being the only group of people in the country less popular than the politicians.

A marital health warning

Nicolas Sarkozy, who collapsed while out jogging, had been put on a diet and encouraged to exercise by his wife, the lissom Carla Bruni.

There are lessons here for both sexes. Women should leave their husbands to decay at their own pace.

Men should think twice before taking up with women who are, in both senses of the word, very fit.

Mandy's on form but it's all too late

Lord Mandelson sounds more like a leader than Gordon Brown does these days. His speech yesterday on universities was impressive.

Everybody knows that tuition fees are going to have to go up if higher education is not to deteriorate further, but talk of raising them arouses fury among the middle classes who benefit most from subsidised higher education.

Lord Mandelson confronted the objections to higher fees head on, prepared the ground for putting them up and made it clear to the universities what they would have to do to in return.

Shame that, thanks to Mr Brown's failings, he won't be around to implement it all.

To the conventional middle-aged parent, Amy Winehouse is probably the most annoying person in the country.

She has turned rebellious adolescence into an art form, and continues to sulk even thought she's old enough to know better.

She has a hairstyle that makes you itch to brush her matted locks. She is the sort of woman who, in your worst nightmares, you fear that your daughters might become.

Yet I have identified somebody even more annoying than Miss Winehouse, and that's the person who decided she should be prosecuted for affray at a concert because of a row with a fan.

The fan got a scratch on her eye and a headache; which does not, to my mind, justify bringing the majesty of the law down on Miss Winehouse, however tiresome she may be. The judge evidently agreed, because she got off.

Prosecuting her was a silly waste of money, as well as rather unfair on Miss Winehouse. I suspect that she is the victim of discrimination against very annoying people.

Emma Duncan is deputy editor of The Economist.

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