Britain's Naughty Banks

by Michael J. Howell27. February 2013 18:53
The threat of negative interest rates aka a rap over knuckles of Britain's commercial banks was mooted last night by the Bank of England as a way to stimulate lending. Negative rates are not new to Switzerland where they have been used to dissuade investment in the Swiss Franc, but they seem a strange tool for boosting lending! Sadly it again shows that the Bank has lost its touch. Why penalise the banks? The reason they are not lending is that they can't, and not that they won't. Lending has little these days to do with reserves and everything to do with interest margins and an ability to garner long-term funding. Structurally, the loss of a branch banking culture and the widespread use of 'computer says 'no'' technology means that Britain's banks cannot easily lend to those SMEs that need capital. But even allowing for this, long-term funding remains problematic and a sufficient doubt to constrain new loans. What we have learned in the last decade ( or should have) is that the size of the Central Bank balance sheet controls the size of market risk premia. A bigger balance sheet ( more QE) means smaller risk premia and wider net interest margins, and hence more lending. The US Fed has successfully learnt this lesson. Making a scapegoat of the high street banks yet again will do nothing to boost British lending, and by making funding harder, the BofE proposal could weaken lending still further.

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