Letting politicians and the well-meaning run banks is a daft (and dangerous) idea

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The other day Vince Cable announced his new small business bank:

"We need a new British business bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy. Today I can announce we will have one. I am working with the chancellor to develop a state-backed institution that will combine up to a billion pounds of new government capital with a larger private contribution."

So there you have it – a super new bank run by politicians that will gallop to the rescue of all those dynamic little businesses that can borrow money from the nasty private banks (or indeed the nasty public-owned banks for that matter). For all that this looks and sounds like just another back-door bank bailout, Vince has his headline and a shiny new state bank to play with!

Now while this sounds like yet another rehashing of 1970s policies – picking winners, national investment banks and doubtless the white heat of technology – it is matched in its lunacy by the latest wheeze from Labour. This is the idea of making banks lend money to poor people:

Labour has published proposals for a policy that it says would force banks to lend more in deprived communities and encourage lending through third sector financial institutions.

The alarm bells are ringing loudly at this policy! Apparently the intention is to force banks to lend in poor places (on what basis is unclear) or else hand over dollops of cash to social lenders – charities, credit unions and so forth. The approach would:

...require banks to reveal what they lent in each community and to lend a minimum amount in every community.

Apparently this was a huge success in the USA where the Community Reinvestment Act was a factor in (although probably not the cause of) the housing-bubble that helped precipitate the financial meltdown we all enjoy today. So Labour in the UK is proposing a lending scheme targeted at people who won’t find it easy to repay the loans. To say this is irresponsible does not quite capture the whole picture. Assuming that the government’s moral suasion makes banks use credit unions and the like to do the lending, we face the added problem of banks run by politicians and the well-meaning lending to poor folk.

And this happens:

Leeds City Credit Union (LCCU) will be hoping yesterday’s sentencing of former manager Beverley Johnson for fraud will mark the end of the most traumatic chapter in its 25-year history.

Over the past five years, England’s biggest credit union has endured the fallout from chronic mismanagement which resulted in near complete financial collapse, two police inquiries, the former chief executive being forced to resign and finally an embarrassing court case thanks to a manager helping herself to the contents of members’ accounts.

LCCU’s mismanagement has been the subject of a long-running Yorkshire Post investigation which first revealed serious concerns as far back as 2007.

Imagine millions of – in effect – free cash landing into these organisations. Take a glimpse over the Atlantic again and look at how politicians and political favours nearly destroyed savings & loan institutions. And consider whether this sort of story might happen again here:

LCCU was shown to (be) rife with cronyism and nepotism, including major breaches of financial rules through favourable loans provided to staff and their relatives.

In one instance, the son of then chief executive Sue Davenport had received a loan for £14,205 when he was only entitled to £1,200. In another, Davenport’s daughter-in-law had been able to take part in processing a loan for herself at a preferential rate.

Criticisms from the Financial Services Authority (FSA) were also highlighted, in particular Davenport’s ability to exert an inordinate amount of control over the books. A letter written by the FSA to LCCU as far back as 2003 specifically referred to “the risk of intentional manipulation” – a risk subsequently shown to be one Davenport was willing to take.

Perhaps we shouldn’t take the risk of letting a coalition of the well-meaning and politics runs banks – it will end it scandal and crisis. And won’t help poor people – folk who need advising not to borrow rather than encouraging into taking out loans they can’t afford.

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