One of the big component of the (currently forthcoming) research by Andrew Baker, Gerald Epstein and Juan Montecino is a factor called “misallocation costs” — that is, the costs that the distorted incentives prevalent in the financial sector inflict on the wider British economy. One of the big factors of misallocation is the distortion of lending. Financial institutions seem to far prefer to lend to whizzy financial schemes than to lend to the rest of the economy.
It’s quite hard on a casual search to find out how much money UK-resident banks lend to the various different sectors of the economy, even though this is one of the most important measures of the usefulness of the City of London to the UK economy.
But it is possible, if you squirrel down into the Bank of England’s data, to construct a picture of what’s going on. The outcome isn’t pretty. Here’s a graph showing what’s going on: I’ve constructed it from a Bank series entitled C1.2, and called “Industrial analysis of monetary financial institutions’ lending to UK residents.” Here’s the graph.
This kind of speaks for itself. (I used data from December 2017, and I was careful to scroll down to the third row in the data series, “Amounts outstanding of lending in all currencies.”)
One pull-out quote for me here is that manufacturing made up just 3.5 percent of all business lending by UK banks. Meanwhile, lending for financial intermediation plus “financial intermediation auxiliary companies” (such as central clearing) made up over 60 percent of all lending. This isn’t bombshell new information – the experts know of this, and I discuss it in my forthcoming book – but it’s still useful to have the update and the graph.
Which raises a question I pose early in my book: “What is it all for?”
You might have thought that the Bank of England, if it were truly serving British society, would emblazon this extraordinary state of affairs across press releases, with technicolour graphics. Instead, it’s rather buried away.
If you compress the categories together for clarity, and put it in a pie chart, it looks like this:
For those of you who like raw numbers, here is a picture of the data. Click to enlarge. Note that the percentages in the graph are percentages of business lending, the £1.23 trillion figure, (not of all lending, the £2.56 trillion figure.)
Now here’s a graph of how this has changed over time, since the crisis.
(PADSHER, by the way, stands for Public Administration, Defence, Social, Health, Education and Recreation.)
The trend here is again interesting. A growing gold wedge at the top – lending to ‘auxiliary finance,’ which includes things like central clearing, which is key for financial derivatives. This is squeezing out (slightly) more traditional lending to mainstream finance and insurance. These sectors, combined, have remained as important as they were immediately after the crisis, but (to put it crudely) the more lightly regulated shadow banking sector has been elbowing out traditional banking. On a very simplistic level, this would suggest broadly that regulation after the crisis hasn’t worked: it has shifted activities into unregulated sectors. However, in fact the total amounts of business lending has fallen somewhat, from £1.53 trillion outstanding in 2009, to around 1.27 trillion in July 2018, suggesting that this is a more nuanced picture. Lending to real estate players has fallen from £309bn in 2009 to £189bn in 2018, a hefty fall.
Still, look at all those other sectors in the ‘real’ economy, squashed down at the bottom. Despite all the pushback against finance after the crisis, they don’t seem to be benefiting very much at all. And that stuff — lending to the real economy — really ought to be what finance is about.
This sector is still broken. Finance-cursed, if you will.
PS here’s what some of the data looks like.