Leading article: Force them to lend

The banks are back to profit, but not seemingly to full business. First of the banks out of the traps yesterday was HSBC, whose profits for the six months this year more than doubled to £7bn, with profits in the UK rising 26 per cent. Lloyds, Barclays and RBS are all expected to follow with similar results.

It's good news for the British taxpayer, who can expect to get back some of the £200bn state loans to Lloyds and RBS sooner rather than later, and to be able to gain a handsome profit when the state sells its shares in the two banks. But it does not appear to be such good news for small and medium-sized businesses in this country, most of whom report continued difficulties, and tougher terms, in obtaining funding.

Financial executives deny this, of course, arguing that they are lending billions to small businesses, that they only turn down a small percentage of requests and that the problem is a lack of demand as much as anything else. This is not, however, what their disabused customers believe, nor economists and politicians, who point to an overall decline in business lending.

The argument goes to the heart of the continuing contradiction between the narrow corporate self-interest of the banks and the needs of the wider community. Two years ago governments, and the taxpayers, were forced to intervene to save the banks from themselves and their economies from collapse not just through direct grants, but loan guarantees, additional money supply and low interest rates. The banks in turn have used these advantages to concentrate on rebuilding their reserves, reducing bad debts and raising extra capital through share offerings.

Fair enough. Any economic recovery requires a healthy financial sector. But the banks have not just used profit to rebuild their own balance sheets but to pay out a staggering amount in dividends to their shareholders and bonuses to their staff. This is insupportable. The Government has the means – although not the determination so far – to force the banks in which it has a majority shareholding to increase lending. It could, and should, have put a higher tax on bank profits. That money could then have been used to fund bigger tax breaks for new business in the recent Budget. And it has, in the revamped powers of the Bank of England, the means to exert considerable informal pressure on the leaders of the industry to mend their ways. Instead of just berating the banks, ministers need to take up these weapons and use them.