Data on the credit crunch.

Weale, Martin

One might expect bank borrowing to rise during a recession as businesses seek extra credit to tide them over; the data have to be seen in this context. Indeed, in the 1990s recession lending by banks adjusted for inflation continued to rise (with one interruption) until almost the end of the recession. However, recently lending to UK businesses has been declining, as figure 1 shows. This indicates lending by UK and foreign banks to non-bank businesses with data available up to the end of the third quarter of 2008 after deflating with the GDP deflator.

We can see from the figure that the decline has been driven by a reduction of lending by foreign banks. However, sterling lending by UK banks continued to rise. Thus the first phase of the crisis associated with the failures of Northern Rock and Bradford and Bingley had no real effect on lending to businesses.

The second phase of the crisis began with the bankruptcy of Lehman Brothers in mid-September and this is scarely reflected in the quarterly data below. However, monthly data are available on lending by monetary sector (M4) institutions in the UK up to the end of December 2008. These, not deflated, shown in figure 2, suggest that in the final months of the year outstanding loans to UK businesses by UK banks turned down. The graph also shows falling secured mortgage lending and unsecured consumer credit lending to individuals falling more sharply, while lending to small businesses has stagnated. Thus, in the second phase of the crisis, the problems began to affect UK banks' willingness to lend to British businesses.

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There is of course the possibility that these data reflect demand rather than supply. Demand for mortgages is undoubtedly depressed by falling house prices. In any case the fact that the housing stock has declined in value must eventually be expected to reduce the value of the national mortgage. Similarly the decline in consumer credit may reflect households' views that they need to raise saving from what were unsustainably low levels as much as an unwillingness of banks to lend.

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If the issue were one of weak demand we would expect to see margins on loans decline. Figure 3 shows the margins on loans to companies with maturity less than one year and household overdrafts over wholesale deposits placed by private non-financial corporations with a maturity of less than a year (representing the cost of wholesale deposits). After rising since August this has now turned down slightly. By contrast the gap between household overdraft rates and wholesale margins show an upturn. Since these are margins over wholesale rates, they suggest that, while for most of the year there was no clear pattern of banks wishing to reduce demand for credit, such a pattern was established from September onwards. Despite December's easing there is risk that this will persist into this year.