The new director general of the CBI, John Cridland, was recorded in the Financial Times last week as stating that the government would be making a huge mistake if it decided to make the investment and commercial arms of banks separate. It was this lack of separation that meant the taxpayer had to pay to bail out the banks, and many people disagree with the statement by Cridland.
Lord Turner once held the position that Cridland does now and has stated how he thinks Cridland is mistaken. He has said about Cridland: “The banks have told him that if he increases regulation there will be less money to lend to businesses and this will further impede economic recovery. What the banks haven’t shown him is any evidence that this is what will happen.”
In the boom times, the banks were lending mostly to projects that involved financial engineering. The money that was being leant to non-financial projects was relatively small. It is the choice of bankers whether they lend to these non-financial projects as even in a reduced lending situation they have enough money to do this. They don’t choose to do this because the returns are simply not as good as they can be with financial investments.
Cridland is seemingly ignoring the fact that businesses simply don’t want to borrow money at the moment. The banks might not want to lend, but businesses don’t want to borrow. This is evidenced by figures that are showing that since 2008 companies have significantly reduced their debts. Since 2009, the biggest companies in the UK have cut debts by nearly £60bn.
Cridland’s comments seem to be unwarranted because there is no reason that regulating banks any further would mean a reduction in the amount that can be leant. Lending to small and mediums size businesses only forms about 10% of what banks lend, so increased regulation won’t affect this very much.
The CBI director also seems to ignore that if we take the non-financial and financial economies separately we get a very different picture. The non-financial economy has grown above average recently but the poor performance of the financial economy has made everything look poor. Criticism has been put on the government for turning the lending to small businesses problem into a political issue. Politicians keep on about how hard it is for small businesses to find loans – hardly an encouraging sentiment.