9 Aug 2012

Subsidised Bank lending problematic

This headline (Government scheme to boost lending to small firms 'could lead to abuse by banks and plunging rates for savers', Daily Mail) points to a serious flaw in all schemes that are designed to boost bank lending. Apart from a command-and-control economy where governments direct banks to lend to specific sectors or companies the use of subsidies (including those from supranational entities like the EIB or World Bank) open the door for abuse. The application process is convoluted and not transparent in most cases and it is far from clear that in the end it is not more important who knows the bank manager well - or is politically well connected - than the viability of the project for which the loan is proposed to be used.