Future Gazing

The banks will struggle to lend, despite second bail-out

Tried to re-mortgage recently or need a loan for your business? Not easy is it...

We’ve heard of toxic waste, met toxic people. Even Britney Spears wrote a song about a toxic relationship. But it's toxic debt that threatens to ruin us all.

Lending has seized up as the banks struggle to come to terms with the huge amount of toxic debt they are carrying on their books. Much of it was debt that they had planned to sell onto other financial institutions, but then found they couldn’t. Now, even lending to solvent companies and creditworthy people is being thwarted.

The government has been asking banks to resume lending to consumers and well-run businesses in an effort to keep the economy afloat. But when survival is at stake, the last thing banks are going to do is continue lending when they feel there is the slightest chance of a problem. But the banks have had billions of pounds of taxpayers money to shore up their books. Surely they're under a moral obligation to start lending again?

Is full nationalisation the only option?

In fact the only way to get the banks lending again may be nationalisation. One of Britain's top financial brains, Guy Hands, told the Financial Times he thinks this may well turn out to be the solution, at least for the short-term.

John McFall MP, chairman of the Treasury committee added his thoughts, saying that if the banks are going to end up nationalised then the government shouldn’t drag it out any longer.

And even rating agency Standard & Poor's (which assesses the creditworthiness of businesses) said of the second bail-out: "Confidence in the banking sector has eroded so much that it is not clear the measure alone will cause material improvement. Full nationalisation of some banks remains a possibility in our view."

Jobs and homes are under threat

The problem is unless lending kick-starts, there is a real chance that the economy will face meltdown.

Now that we have near-nationalisation of many of the biggest banks in the UK - RBS (Royal Bank of Scotland) is now 70% state-owned - if the second bail-out doesn’t work, full nationalisation of ailing banks will be the unavoidable next step.

And the reason why this may be necessary is that the markets are having a field day with sterling, UK stocks and talk of Britain going bust. Maybe the only way to stop the run is full state ownership of our afflicted banks. And the subsequent restoration of order.

Are they any upsides to nationalised banks?

If our ailing big banks are nationalised perhaps it would be no bad thing:

• All the bank’s debts will be laid bare – no more nasty shocks
• The government can ensure they increase their lending activity
• Governance may improve
• Finally, and most importantly it may be a chance to get the economy back on track and restore the faith of the markets in UK plc

In the meantime, do I have easier access to borrowing?

Despite the second bail-out, banks will still require a large deposit or substantial equity before resuming mortgage or other lending at a reasonable rate. Figures out yesterday showed that mortgage lending fell by one-third in 2008. December’s figures alone fell by 47% year on year. And it’s largely due to the inaccessibility of mortgage finance.

On the release of the latest figures, the Council of Mortgage Lenders director general, Michael Coogan, said: “A mortgage market solely funded by a few large banks and building societies would be unlikely to have the capacity to match future consumer borrowing demand… Increasing the range of active lenders and funding capacity in the market overall is a vital next step.”

Oh and just in case you think that means we could all go back to the world of easy credit – that is well and truly over. Nationalisation, if it comes, will still mean that only the safest bets will get their much-needed loans and mortgages at a decent rate.

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