Interesting Proposal to Increase Lending to Consumers

by Darwin on September 3, 2012

One of the biggest disappointments with the various bank bailouts in the US and Europe was that governments (i.e. taxpayers) stepped in to prop up banks and prevent widespread collapses in the financial sector.  Part of the deal was supposed to be that the bailouts would have shored up the balance sheets and prompted banks to start lending to businesses and consumers more since the credit markets had virtually dried up.  What ended up happening was banks didn’t lend out nearly the amount anticipated and taxpayers felt like they got the short end of the stick.

I can tell you that I refinanced a few months back and the amount of paperwork and barriers to doing so made it practically seem like banks don’t even want to lend to people with perfect credit.  There were issues with a recent credit card my wife had opened (bad timing), the fact that I had rental real estate (they wanted to assume that I would have no income from the properties for 2 full years and see if my income could fund it), and various other things that I had never encountered during prior refis.  You’d think with the banks borrowing at near zero and the ability to lend it to people looking to refi, they’d be pushing through refis very smoothly, but even with 800 credit, ours was anything but.  Thankfully, we got it done, but it’s not just my anecdote that consumers and business are having difficulty with access to credit, it’s happening on a broad scale, which prompted this idea from the UK: Increase savings on funding costs the more a bank lends.  The banks have full discretion to make the loans they feel are appropriate, and they are on the hook for losses of course.  But the net impact is that by providing incentives to the banks, the likelihood of access to credit increases.

While it was proposed for the UK, there’s no reason it couldn’t work for US banks too.  Presently, if you can’t get access to a bank loan in the UK, consumers would rely on say,  The beneficial piece is the rapidity of access to cash there, but obviously, traditional bank credit carries lower interest rates, so there’s a tradeoff.  If consumers and businesses had quicker and easier access to credit globally, you’d think that would help spur business creation, spending, and hence, job creation.

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