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Bank Which Breaks the Cycle Could Help Stimulate Economy

Bank Which Breaks the Cycle Could Help Stimulate Economy

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 2 minutes

Banks make profits by lending money at a higher rate than they pay for it – that’s a “no-brainer”. They make money by taking risks, but not the risks which contributed to the current global recession. That could be compared with an ill-advised wager on the two o’clock at Haydock. (No disrespect to the horse racing fraternity)

No, traditionally, a banker’s skill is assessing what is an acceptable business risk and charging a rate accordingly. That also doesn’t mean taking the current stance of being totally risk averse. Like many businesses, the banks lack confidence – the confidence to back businesses which are not “blue chip”. Reaching a decision to lend is not the end of the story for a banker. Marginal businesses or those experiencing temporary financial problems need closer managing and the banks have the expertise to help business owners and at the same time protect their own investment. They also have tools at their disposal including covenants attached to lending contracts.

Businesses are suffering as a result of a continued dearth of the availability of commercial credit and this will hamper the rate at which the economy recovers. So as we only just struggle out of recession (with a huge journey ahead) at some point one bank – perhaps a new player in the market – will break the cycle. It will take the bold step and be ahead of the rest and start to lend to more marginal businesses. Not sub-prime lending, but lending to the many SMEs which generate most of our GDP and employ the vast majority of our working population.

And the first lender to break that cycle could help stimulate economy. There are numerous directors of decent companies disillusioned with the lack of financial support and are itching to have the opportunity to move banks. Once that first step has been taken market forces will prevail. Others lenders will follow suit when they see their lending books shrink and competitors picking up the goodies.

The economy needs that stimulation and the banks themselves need to return to “business as normal” as soon as possible to improve their own profits and the strength of their balance sheets.

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