One part of Alastair Darling’s Budget that appears to have received little attention from the media is his plan for a “Credit Adjudication Service“. This new body, it appears, will provide an appeals process for small and medium businesses that have been denied credit by banks.
Regardless of the fact that, according to the British Bankers’ Association, 85% of credit requests by small and medium businesses are already granted, how can a free banking market exist when a government appointed body can call into question the economic decisions of a bank manager?
Banks are companies. They are responsible to shareholders, not to society collectively, not to the wider economy and certainly not to the government. It is in their interests to lend to a company with a sound business plan, who they believe will pay the money back and be a viable enterprise. Clearly they will refuse credit when they believe a business project is an unsound investment.
These decisions must be left up to the individual company. An appeal body cannot possibly understand the level of nuance that a bank will. It also lacks the incentive a bank has to ensure that the investment is a wise one. The reality is that lending decisions are complex – a one-size-fits-all approach will not work in a sector with different private companies working to different priorities and risk assessments. If Barclays and RBS have different risk assessment profiles, how can an appeal body decide which one is “right”?
Ultimately this muddle results from government ownership of Royal Bank of Scotland and Lloyds. The politicisation of money lending is not the way to encourage enterprise; rather we should allow banks to make informed decisions about the situations where it makes sense to lend and those where it does not. As we saw in the United States with the impact of the Community Reinvestment Act, this is not a path we should go down. That Act mandated the amount of loans that banks had to make to low-income borrowers, resulting in loans being made which were not financially viable. Indeed, attempts to spread the risks of these loans led to the disastrous bundling of ”sub-prime” mortgages to be sold on the secondary market.
The government is ill-suited to picking winners, and having a government agency attempting to second guess bank managers is not the way to a thriving and successful market economy.