David Prosser: We're all still waiting to see those lending promises honoured

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The Independent Online

Outlook Alistair Darling's promise that in return for handing over taxpayers' cash he would force banks to get back to the levels of lending seen in 2007 always looked something of a pipedream. It still does, despite the Prime Minister insisting yesterday that proposals are in the pipeline to force banks to do more for small businesses, at least.

All the evidence is that small companies – even those with the most viable of business plans – are struggling to persuade their lenders to keep credit lines open. Profitable firms are being forced to close for the simple reason that when overdraft limits or short-term loans come up for discussion, they are slashed back or not rolled over. The Independent hears from such businesses almost every day.

This failure by banks to honour the commitments given in return for bail-out cash is not yet particularly visible in the big picture, because public data on small business lending is relatively hard to come by and the scale of insolvencies does not yet show up in official figures.

The equally dismal failure to raise lending levels in the mortgage market is, however, much plainer to see. It is revealed in the monthly figures published by the mortgage industry – which shows no sign of recovery – and in the fact that banks and building societies are plainly not passing cheaper borrowing costs to clients.

The latest example of this can be found in a survey on overdraft costs published yesterday by Moneyfacts, the personal finance data provider. It reveals that most leading current account providers have raised their overdraft rates sharply in the past year and failed to bring them down again. The miscreants include three of the "Big Four" (the exception being Lloyds) as well as a slew of smaller providers. In the worst case, the cost of overdraft borrowing with Clydesdale Bank has risen by more than 7 percentage points.

What has gone on in the mortgage market itself has been equally craven. A fortnight or so ago, leading lenders were summoned to Downing Street and told in no uncertain terms that they should pass on this month's 1.5 percentage-point interest rate cut. Most left the meeting and immediately cut their standard variable rates by the full amount – cue much self-congratulation at the Treasury and No 10. Unfortunately, only a tiny number of people taking out new mortgages pay their lender's standard variable rate. Instead, most opt for tracker deals, the cost of which automatically moves up and down in line with the Bank of England's base rate. And immediately after that rate cut, lenders withdrew all their trackers – they are now slowly replacing them with inferior deals.

Take the Halifax, the country's biggest mortgage lender. Its cheapest tracker deal previously cost the Bank of England base rate plus 1.19 percentage points – which came to 5.59 per cent at October's base rate level of 4.5 per cent. The best new deal on offer now costs base rate plus 1.99 percentage points – a total of 4.99 per cent at the new base rate. In other words, the cost of this flagship deal has come down by 0.6 percentage points – less than half the rate cut offered by the Bank of England.

This is why members of the Bank's Monetary Policy Committee keep talking about how the "transmission mechanism" is no longer working. Their decisions on monetary policy are not fully delivered across the general lending market, limiting the effect of even quite dramatic initiatives such as the last big rate cut.

It is difficult to know exactly what the Government can do to fix the transmission mechanism. While it has taken stakes in several leading banks and nationalised two lenders, it also insists that these operations will be handled on an arms-length basis with commercial instincts in mind.

What is unhelpful, however, is repeatedly insisting that the pledge extracted from lenders is being fulfilled, or that it will be very soon. It is frustrating enough for people suffering from the contraction in the lending market, whether they are small businesses or mortgage customers, without being told that government actions have begun bearing fruit.

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