Let me start with a rather important paragraph, with apologies for the jargon.
“The Commission concludes the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.”
Where did it come from? ‘Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” (page xxvii), since you ask.
Why is it important – or, to be precise, why is it important tomorrow? Because tomorrow is an important day in the history of UK banking. It is the long-awaited, little-debated, tremendously creative moment when the UK banks reveal the geographical spread of their lending.
Which, thanks to the efforts of Lib Dems in the House of Lords last year, will be down to postcode level, about 9,000 of them.
The US report on the causes of the subprime crisis is important because the position of the big banks was flagged up in the Saturday papers, because they fear the reaction. This is what the Daily Telegraph wrote, quoting banking ‘sources’:
“Sources said that the reason much of the money went to support SMEs in the South East was because there were many more businesses in that area.”
Maybe that is true, but maybe the causality is the other way around. Maybe there are so many small businesses in the south east because there is a responsive lending infrastructure there.
Just imagine if that was the case. It would mean that we had a vital clue to how to rebuild local economies, sustainably and effectively. It would mean that, as you might expect, people’s imagination and entrepreneurial zeal was spread pretty evenly.
All we would need is an effective local lending infrastructure. That must now be organised, and organised urgently, paid for by the big banks in lieu of the money they are unable to lend themselves.
But they also came out with a major piece of obfuscation, warning that the Community Reinvestment Act in the USA – which, since 1977, has required the big banks to create a new community lending infrastructure where they are unable to lend – caused the subprime crisis by lending to poor people.
They are afraid they will be asked to do the same here, as indeed they will. That is why the report of the US commission is so important. It quite explicitly rules out this interpretation.
In fact, I make this prediction. Within three years, the UK banks will be operating under similar legislation here, and will be doing so happily, generously and with relief, because – once and for all – it ends the whole argument about whether they are lending enough to SMEs. Because, where they can’t lend, they will be creating the infrastructure which can lend.