Readers Question: why are banks still not lending despite the bail out and increase in money supply? If all this time they have taken risk, why cant they take risk anymore? They should have more borrowers now due to low interest rates,if they can help small business who need the money then growth can increase gradually. All the banks should pass the rate cut.
I wish my bank would pass the rate cut onto me! From the last 2.5% cut in base rates, my mortgage company Standard Life has cut their standard variable rate by 0.9% (or thereabouts)
There are a few reasons why banks are reluctant to lend
- Falling house prices. With house prices falling, banks could end up with large losses in event of repossession. If they lend a 100% mortgage for £100,000 and house prices fall 20% they will lose £20,000. When house prices are rising default is less important because they can sell house and even make a profit. This is why banks are requiring large deposit for loans and why people struggle to get mortgages despite
- Recession In a recession there is a greater chance that people will default on their mortgages / loans. Businesses are more likely to go under. Therefore banks want to be much more cautious about lending in case they lose their loan.
- Poor Balance Sheets. In the boom years, banks became highly leveraged. Basically this meant they lent a high % of their deposits. Banks like Northern Rock were borrowing to lend. These business strategies are now seen to be too risky so banks are trying to encourage a greater % of deposits. This is why they don’t want to cut rates. They feel they need to attract savers not borrowers.
- Lack of Finance. Banks are reluctant to lend to each other. There is a shortage of credit. Therefore, although credit is cheaper, it just isn’t there
- It is argued that if banks do pass on the whole rate cut, then they will lose their depositers and therefore could actually have less funds to lend out.
- However, government is putting pressure on nationalised banks to pass rate cut onto consumers.