Bank loans skewed to households

THE banking crisis is far from over and the government's well-intentioned policy response is in danger of slowing its recovery, according to new research published yesterday, writes Erikka Askeland.

Analysts at Evolution Securities went back as far the 1920s to trace the history of banking to the present day.

They found that never have the banks had so much lending on their books compared with so little in the way of deposits – currently a deficit of 740bn.

Nor have UK consumers ever been in more debt than they are now. Household borrowings are "off the scale", said Evo.

The underwriters of the consumer debt are largely the UK banks. Whereas in the 1950s, 80 per cent of loans were to industry, now over 70 per cent is to households.

Regulators last year called Lloyds and RBS, banks with substantial taxpayer shareholdings, "bullet proof", but Evo maintains that they both have too much in the way of loans and too few deposits on their books.

The question is whether the UK consumer can keep up the payments on its collective debt, which starts to look more unlikely as unemployment rises.

Nor can employers be reasonably expected to put wages up. Evo estimates it would take double-digit wage inflation to meet payments on debts.

The notion that current economic woes will be salved by getting banks lending again is also questioned.

While there may be an argument for continuing lending to businesses, lending more to consumers who are already failing to meet their payments would only make the debt mountain topple, with real risk of an "avalanche of bad debt", Evo analysts say.

Compared with 1954, bank lending to corporates has grown 246 times. While it may be worrying that this outstrips GDP growth during the same period, it is nothing compared with households – up 1,764 times.

Of course, households were borrowing against rising house prices – a "virtuous circle" says Evo. But the vast debt burden and falling house prices is a vicious circle.

Although borrowers and estate agents think higher house prices are always good, lower house prices are a healthy sign, they argue.

Falling house prices and a reduction in competitive lending are evidence of an economy trying to right itself.

The best cure is to get borrowers paying back what they owe – it has started but still has a long way to go.