A successful economy needs a banking system that can support fair and sustainable economic growth without the need for government bailouts. But UK banks are doing the opposite.
Most UK bank lending does nothing to support the productive economy. Instead it goes towards property and financial speculation, which pushes up house prices and makes financial crises more likely. And when crises hit, bank credit dries up without expensive government bailouts. This situation needs to change.
At the moment, the useful lending that goes to small and medium-sized businesses accounts for less than 10% of the total. Even this ‘good’ credit is often only at punitive rates of interest.
Instead, the bulk of banks’ loans are for mortgages to fund the purchase of houses that have already been built. This lending creates no extra jobs or output and serves only to push house prices up. As banks have lent more for mortgages, homeownership has fallen to the lowest level in 30 years, intergenerational equality has worsened dramatically, and the economy has become much more prone to boom and bust.
Despite delivering negligible social benefit, our banks enjoy a huge public subsidy. When banks issue loans, they essentially create money out of thin air. They’re able to do this in the knowledge that if their loans go bad, the taxpayer will step in to protect consumers’ deposits.
This state protection means that banks can get away with paying depositors almost no interest, despite the fact that banks can charge high interest rates on their loans. The value of this effective subsidy to UK commercial banks is calculated at ~£25bn every year.
When there’s a recession, UK banks stop lending altogether, requiring a massive bail-out to start lending again. While £133bn of taxpayer money was used to bail out banks in the last crisis, the true cost in terms of lost output and jobs has been estimated by Andy Haldane at the Bank of England in the trillions.