Can Danny Alexander get banks lending?

Information isn't enough, writes Carl Packman. Financial institutions need to know about their obligations.

A Resolution Foundation report from 2010 pointed out that despite the so-called boom period from 1997-2007, “incomes of the bottom three-fifths of the UK population failed to keep rise with rising prosperity”. So how were we able to eat? Easy: the dramatic rise of mainstream consumer credit. 

Credit cards and friendly banking institutions filled in where wages dropped. But then after the recession mainstream banking institutions became slightly risk averse. Credit wasn't so free-flowing, and wages still weren't rising. In fact real wages fell on average by 7 per cent in the two years from the end of 2009 (according to Stewart Lansley in a chapter of a new book called The Socialist Way). 

Soon the technical recession would be over, meaning the UK would enjoy positive growth, but the practical recession, where households under-served by banks were tightening their own budgets and feeling the full force of what the economic collapse had to offer, was just getting started. 

Now, Chief Secretary to the Treasury Danny Alexander will try to reverse this by announcing that banks, by January 2014, will have to reveal their lending data across 10,000 postcode areas. The Treasury has said that this move will encourage competition by helping smaller lenders to identify unmet need. It will also show which communities mainstream banking is neglecting. 

Disclosure of lending trends is to be celebrated, but it's only a first step. When we start to find patterns of unmet need only then can we make banking better by reminding those financial institutions of their obligations towards wider society, and this will address the lingering problem of the un- and under-banked

Fortunately we don't have to reinvent the wheel.The Community Reinvestment Act (CRA), was enacted by United States Congress in 1977 with the intention of encouraging depository institutions to help meet the credit needs of the communities in which they operated.

It was noted that though banking institutions were and are privately capitalised, they had and have an obligation to serve their local communities. What started as a way of disclosing lending details, much in the way that Danny Alexander wants to, it ended up being a way to highlight where banks were not meeting the credit needs of low and moderate income communities and permitted regulators to penalise lenders with weak records.

By 1984 three large lending institutions, First National Bank of Chicago, Harris Trust and Savings Bank, and the Northern Trust Company had all committed $153bn to reinvestment purposes, focusing on single family and multi-family housing and small business loans. Other larger institutions such as the Bank of America set aside $12bn annually to ensure consumer loans were being lent to lower income families. It took time, but the act proved highly successful.

It was not without its problems, however, which the UK can learn from. At the outset community groups who oversaw the enforcement of the CRA found fault with the way in which the regulators supervised banks. It was supposed that they were not rigorous enough and that they were not properly enforcing the new requirements effectively. 

That's why in 1989 Congress amended the act to require regulators to show their CRA evaluations. After this, from 1990-1992, only 939 banks (9.8 per cent) were deemed in need of improvement and 87 (0.9 per cent) substantially non-compliant out of 9,520 banks that were covered. 

The important message about the CRA, pointed out by Allen J Fishbein in his fifteen year evaluation of it, is the following:

“Despite the perception by many bankers that lending in low and moderate income areas is too risky and unprofitable, the experience over the last fifteen years has debunked these myths. Numerous examples of successful community reinvestment partnerships that have come into being since the CRA's enactment demonstrate that lending to the residents of older urban neighborhoods is both prudent and profitable for banking institutions.”

So what Danny Alexander should see to before his new measure is enacted next year is:

  • Make sure lending data disclosure rules are properly enacted;
  • Oblige regulators to publish their reports;
  • Call for a reinvestment action council, made up of people in local communities, that can publicly testify on banking institutions lending records (or better still, grassroots groups can set these councils up themselves); and
  • Set penalties for banks who do not invest sufficiently in local communities and use that money to sponsor local credit unions.

Moves towards disclosure are positive, so lets keep the momentum and make banks benefit communities, too.

Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR