A late calling to account

A late calling to account

A rare silver lining in this recession is that a veil of mystery is being lifted from the longstanding lending practices of British banks. Suddenly they are understood as not necessarily always in the best national economic interest.

Mortgage and business borrowers alike are newly empowered by the £37bn bank bail-out, and change is afoot. Yesterday the Royal Bank of Scotland, now 58% owned by the taxpayer, promised it would give distressed homeowners six months' grace before it moved to repossess their property. Last week it said it would guarantee the level and price of its overdraft commitments to small business until the end of 2009 - providing, it qualified, the risks of their situation did not substantially change.

These are concessions of the sort that have not been made in any postwar recession. They make it impossible for Lloyds-TSB/HBOS not to follow suit. HSBC will not want to be outdone. Only Barclays, suffering the burden of the bail-out terms from its sovereign wealth fund investors, is likely to cling to the banking tradition of being providers of umbrellas except when it is raining. It will no longer be politically acceptable.

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Bankers, in fairness, are the custodians of other people's money. They have to provide cash to their depositors whenever they want it, even as they tie it up in loans to homebuyers and business. This confidence trick requires careful managing. British banks' approach has been to keep their lending as short-term as possible, to have it collateralised against bricks and mortar, to keep tight control at headquarters and to recall loans at the first sign of trouble.

It works, but it is brutal. It does not favour long-term investment. It biases lending towards property rather than business innovation. It does not favour manufacturing industry that needs most support in downturns. It makes home ownership high risk for working-class families. And it exacerbates recessions.

There is another approach, more widely used in mainland Europe and Japan. It is best illustrated by a story from yesterday's Financial Times about the Reading-based Magal Group. Owner Gamil Magal wants a £1.5m loan from RBS to tide over his engineering firm during the recession, collateralised against £12m of assets. The company is solid but now losing money; properly supported it might survive. In Europe and Japan, banks tend to be supportive of their Magals, with whom they have long-term relationships. They certainly demand restructuring and redundancy, but they shepherd the scaled-back firms to recovery, offering not just finance but advice and business knowledge.

In Britain banks do not support such relationships. But they do know British financial protocols. RBS, says Magal, responded to his request by sending him an insolvency expert. When RBS was privately owned, he would not have dared complain and tempt such awesome power of life and death. In today's climate, he feels he can go public.

If the banks together support all the firms in the manufacturing value chain then each individual firm is more likely to pull through. Magal needs supporting, but so do his customers. RBS cannot have an open chequebook, but unless it and other banks are more collectively accommodating to firms' requests, they create the very risks RBS is alert to.

UK banks have never been properly accountable for their actions, hiding behind the myth that, as their decisions are taken in markets, they are necessarily efficient. They are not. If more businessmen speak out, and the government has some guts, the next 18 months could see a transformation in British finance. It is long overdue.

• Will Hutton is executive vice-chair of the Work Foundation will.hutton@observer.co.uk

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