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Banking moves that will shape all our futures

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Chancellor Osborne's Project Merlin received mixed responses

Chancellor Osborne's Project Merlin received mixed responses

PA

Chancellor Osborne's Project Merlin received mixed responses

So the Government has nudged the banks into lending more to industry.

Project Merlin, as it is called, is an agreement whereby banks will lend about £190bn to businesses this year - including £76bn to smaller firms - curb bonuses and reveal some salary details of their highest paid people.

Perhaps unsurprisingly it was not greeted with great acclaim by anyone. The banks found themselves landed with an extra tax the day after they had signed, the Opposition claimed that it was inadequate, and a Liberal grandee managed to get himself sacked for attacking it.

But there are two things happening in the world of banking that will shape all our futures. One is that banking is becoming less international; the other that banks are playing a less important role in financial intermediation.

The first is happening at several levels. One of the reasons why banks got into such a mess is that they started lending outside their national boundaries.

Here in Britain, the main reason why the number of new mortgages has halved is because the fringe lenders, mostly foreign, have pulled out, leaving the main UK lenders the only suppliers of credit.

There is already less competition in British banking, which is why the Government has stepped in to try to boost lending. Obviously banks will not lend money, indeed should not lend money, if they think the borrower is unlikely to be able to repay. But if you look at delinquency rates on different types of loan the two areas where they have risen least have been mortgages and loans to businesses.

The form of lending that has become most dangerous, from the lenders' point of view, is consumer credit. The rates are high enough to make it profitable and as a result non-British banks are still active in the market.

The second big change is disintermediation. A horrid expression, so a word of explanation, if you or I deposit money in a bank and that bank uses it to make a loan to a company, it is the intermediary between the two of us. It carries the risk of default. If on the other hand a company makes a new share issue and we buy shares, we pay the money to the company and we carry the risk. There is no intermediary. So a shift from bank finance to market finance is known as disintermediation.

There is plenty of money around - it is just that people would rather lend it directly to sound companies and carry the risk themselves rather than deposit it at a bank, get a dreadful rate of interest, and hand the profit to the bank.

Of course this is more awkward to do in our personal lives: you cannot go to the stock market and issue some bonds rather than get a mortgage.

Until the 1960s UK companies relied much more on market finance, with banks only lending for short periods on overdraft. That all changed with fixed-term loans, the development of the money markets, the growth of syndicated lending and so on.

You cannot uninvent all the new lending techniques developed by the banks over the past half-century. But you can use regulation to curb the excesses and, even more important, it may be that people will try and avoid using banks as intermediaries.

Don't get me wrong. Banks are not going to disappear by any means. Quite simply, we will come to rely less on them.