The real lending story

Bank of England financial data for Q2 were published this morning. (Available from the Bank's website -- but be warned, the presentation of the tables is baffling). As usual, the initial media coverage has been devoted almost entirely to the mortgage statistics, but the data for corporate loan write-offs are arguably more significant -- and point to a fundamental flaw in government policy.

Let's get the mortgage data out of the way first. The number of mortgage approvals in July rose slightly to just above 49,000, the best figure since May 2010. This is barely more than half the average monthly level seen before the financial crisis. It's striking to note, however, that the aggregate value of mortgages approved has fallen much less steeply than that would suggest, which strongly implies that lenders are concentrating their efforts on higher-value properties, which may be less risky. This is consistent with the emergence of a growing north/south divide -- or more exactly, London/everywhere else divide -- in the housing market. Not a good thing.

Now let's get back to the loan writeoffs. During Q2, banks wrote off £2,935 million in loans to the corporate sector, almost three times as much as in Q1, and significantly above the previous post-crash peak seen in Q4/2009. The Q2 level is close to ten times higher than the average level of writeoffs before the financial crisis hit.

Here's where we get to the contradiction underlying the government's approach to the banking sector. It wants banks to strengthen their balance sheets, but at the same time it wants them to boost business lending -- it has even set specific targets for this, under its so-called Project Merlin agreement. But if you were a banker studying the latest data, you'd surely draw the conclusion that the more business loans you advance right now, the more you stand to lose. And the more you lose, the harder it is to boost your capital.

All bank lenders know that it's easy to shovel money out of the door, but your job isn't done until you get it back. But does Vince Cable know this -- or, like the ostrich in that old rugby song, doesn't he bloody well care?