Tuesday, February 22, 2011

Bank Lending A Tale of Two Sectors

Bankers are the new Trade Unions! Regular readers will know that this blog has been harshly critical of the way that the credit crisis has been managed, particularly in the UK. This is not a position taken from the 'politics of envy' or an underlying belief in collectivisation.

Bankers are the New Trade Unions

On the contrary, the strongest criticism of the actions of redistribution of income and resources towards the banking sector-this always happens when there is a financial crisis- is that it is in direct opposition with free market principles. Upon reflection, the financial industry leaders should be seen to be more akin to the trade union leaders of the 70's and 80's. Depicting them as a collection of  'Gordon Gekko like' figures is actually damning them with faint praise. Gekko was ruthless, greedy and corrupt but at least he was efficient!

The trade union leader analogy is accurate because of these groups have a handle on the public purse and are seeking to use political muscle to enact a massive redistribution of income towards their special interest group. However, the trade unions never succeeded as well as the bankers did. Scargill thought that coal was 'too big to fail', he was wrong. The bankers had the advantage of being too big to fail, and they have gamed the taxpayer accordingly.

Creative Destruction being Destroyed

Aside from the moral considerations, is the fact that capitalism needs the 'creative destruction'. It needs the failures to be moved on to more productive enterprise. When corporation fail, their managements get moved on and new people are brought in, or the market will not support any restructuring plan. That is the way it works. Why is it any different for the banking industry?

These thoughts came to mind following the release of a couple of news pieces this week.

Firstly,  Lloyds agrees to pay £500m mortgage refunds
Britain’s biggest high-street lender, will pay refunds worth £500m to hundreds of thousands of its mortgage customers in the largest consumer reimbursement agreed with regulators.
About 300,000 customers with mortgages sold under the Halifax brand between 2004 and 2007 are in line for payments ranging from £5 to thousands of pounds after the bank failed to make clear how much interest they were paying on their mortgage.
So, yet more evidence comes to light of the pitiable management by the banking industry.

An Alternative View From the Building Societies

However, an alternative approach could be discerned from some of the traditional building societies. For example, looking at the latest statement from the Leeds Building Society

Chief Executive, Ian Ward, said, "Leeds Building Society has again delivered a very good set of financial results despite the continuing challenges for the financial services sector. Another year of record operating profit, record savings balances and 52,000 new members demonstrates that our successful, sustainable business model continues to deliver security and value. 
"Our new lending increased from £922m to £984m in 2010; this represented £250m above our market share. We continue to adopt a prudent approach to lending as demonstrated by our average loan-to-value (LTV) on new mortgages in 2010 being just 53%. Furthermore, all of the Society's residential lending is funded entirely by retail savings.

"In 2011, we plan to increase our new lending by at least 25% to around £1.25bn. This will be welcomed by home buyers as we provide more capacity and choice to the UK mortgage market.

Now the question has to be asked. Why isn't the Government doing more to promote these sorts of organisations? They should have been rewarded with increased market share following the follies of others. However, the policy of choice has been to carry on bailing out the perpetrators of the credit crisis rather than rewarding -or rather letting the free market reward- those who really did know the meaning of the word 'prudent'

1 comment:

  1. Great, great post! It’s something I have never thought about, really, but it makes a whole lot of sense. Thanks for sharing

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