How do we square the insistence of the banks that they are lending to deserving small and medium-sized businesses with the complaints from those very same enterprises that they are being starved of credit?
Mervyn King, the Governor of the Bank of England, answered that question brutally in evidence to the Treasury Select Committee last week. The banks' treatment of businesses was “heartbreaking”, he said, which rather implies he doesn't believe what they say.
Lloyds, yesterday's bank in the spotlight, rejects the criticisms of those who say it is not playing its part in supporting the economic recovery, and published a long list of statistics to demonstrate just how much support it is offering businesses. Eight in 10 applications for credit are accepted, lending to business totalled £23.7bn in the first half, £5bn more than last year, and 60,000 new small-business accounts have already been opened in 2010.
Doubtless, all these figures are true. They do not take account, however, of the businesses subtly advised not even to bother applying for credit, or the enterprises which suddenly discover a long-standing overdraft arrangement has been pared back (a common occurrence, which contributes to the fact that net lending is so much lower than gross lending). Yes, demand for credit is lower than it has been in the past, with some businesses anxious to strengthen their balance sheets in the face of economic uncertainty. But there are just too many complaints about credit for them all to be dismissed as anecdotal evidence.
This is not to single Lloyds out. All of the banks face the same balance-sheet constraints on their lending. Moreover, the endless list of banks that have pulled out of the market to lend money to British businesses since the financial crisis — a string of foreign banks, all the building societies, many specialist intermediaries, and so on — has left too big a hole for the remaining players to fill.
Worse, the prognosis for the years ahead is not a happy one. The taxpayers' support the banks have had, via the credit guarantee scheme and the special liquidity scheme, must be repaid by the end of 2012.
Another crunch is coming in other words. It may or may not be really serious. Lloyds, for one, appears to be making good progress on its funding, but it will certainly be a continuing constraint on the banks' ability to offer further advances.
There isn't an easy answer to these problems. For all the posturing of George Osborne, he cannot force the banks to lend more and doing so would not necessarily be desirable given that we want them to continue improving their capital and liquidity.
Even the bonus question is a distraction: yet more payments to fat-cat bankers may be distasteful, but the value of the hand-outs does not scratch the surface of the lending shortfall.