Banks deserve criticism for bad service – but not for refusing to lend

I was interviewed by the BBC a few weeks ago about the way in which the UK’s retail banks regularly rip off their customers. It wasn’t exactly a tough interview to do (you can watch it on Panorama tonight).

There are hundreds of things to point to if you want to make a case for retail finance being a deeply unpleasant industry. In last week’s magazine I pointed to Lloyds’ treatment of my over-trusting mother – they’ve helped themselves to thousands of pounds of her money via both incompetence and unfair policies, and quite clearly have no intention of compensating her for doing so. Ruth Jackson also had a go, noting that she too has a hundred horrible stories to tell, and pointing to the ludicrous overdraft and other charges we all constantly get hit with.

And this weekend Vince Cable joined the fray, claiming that the banks offer a “very bad deal” to most of us and criticising the general lack of transparency as well as the ongoing “unacceptable bonus culture”. He talks about this at greater length on tonight’s programme as well, and I totally agree with him – the bonus culture has to go.

However, there was one area of questioning during my interview that was not quite so straightforward – the bit about lending. There is a general consensus that the banks are being very mean with money at the moment – that they aren’t lending out much and that they should be. We hear endless stories of property buyers who a few years ago could have taken out ten mortgages, now being unable to get one. We hear even more tales of small businesses suddenly having their overdrafts pulled, or their loan rates ratcheted up, without warning.

But while it is certainly true that most of our retail banks fall down pretty severely on the customer service front when it comes to loans, it is hard to criticise them for not lending money out at the moment. We’ve asked them to take less risk in future. That means that we can’t expect them to lend money to would-be homeowners with small deposits when it is clear that house prices will fall. It means that we can’t realistically expect them to lend much money to service-based companies, given that there is a good chance the long-awaited double dip is just around the corner. If you were a bank manager charged with avoiding bad loans, would you lend money to an upmarket cupcake shop, or a hairdresser – or indeed any other kind of retail outfit right now? I wouldn’t.

We’ve also asked them to repair their balance sheets and to maintain their capital ratios, something that in itself means there is less money available for them to lend. So while we can blame the banks (along with central banks, shareholders and regulators) for getting us into this situation in the first place, and we can blame them for the atrocious way they treat and have always treated their retail customers, we can’t really blame them for keeping their profits close to their chests today. If we want them to behave differently we’ll need to underwrite the losses they are bound to make by doing so, and to cut the capital ratios we require from them. I can’t see either of those things happening.