Bank lending – two sides to the story

THE OTHER DAY, the Bank of England published its report acknowledging that the weakness in bank lending since the start of the economic crisis “reflects a combination of tighter credit supply and weaker credit demand”, but their research goes on to suggest that “tight credit supply is likely to have been the dominant influence”.

In other words, the BoE seem to be siding with the general business population, and not accepting the major clearing banks’ argument that poor lending figures are the result of lower demand.

Far be it from me to take sides in this never ending debate, but…I read an interesting piece on the Adam Smith Institute’s website last week written by its executive director, Tom Clougherty.

He was quoting from some recent McKinsey Global Institute research that demonstrated that de-leveraging has followed nearly every major financial crisis since World War II. Although there are instances of economies de-leveraging through default, high inflation, or by growing out of debt, interestingly, the most common type of post crisis de-leveraging is belt tightening.

So maybe the banks are right to some extent. Maybe it’s just a typical and understandable human reaction for consumers and businesses to be wary of borrowing to expand in the immediate wake of such a shocking economic crisis like the one we’ve just witnessed.