Through these successive waves, the world financial system found itself with almost every link in the credit chain – in the chain of trust – having been weakened or broken. That is evident in surveys of the public’s trust in industry: banking and finance are firmly rooted to the foot of the league table of trust, in the UK and internationally (Chart 6). That loss of trust is mirrored in aggregate bank lending in the UK, in particular to companies, where annual growth has fallen from a peak of 23% in March 2008 to around zero now (Chart 7). And this has in turn been reflected in the largest and most synchronous global economic slowdown since the Great Depression. Confidence and credit So how is trust, and thereby credit, to be restored? To date, the answer has been to rely on the one sector whose credit has not been seriously questioned – governments and central banks. There has been large-scale provision of government and central bank credit over the past two years in an attempt to ease pressures and shore up breaks in the private sector credit chain. These interventions have been unprecedented in size during peacetime. The total potentially on the table is in excess of $ trillion.7 That is roughly $ for every man, woman and child on the planet. Half of the world’s 20 largest banks have needed direct government support. Central bank balance sheets in the major financial centres, including in the UK, have more than doubled in size.
So the economics of banking do not suggest that bigger need be better. Indeed, if largescale processing of loans risks economising on the collection of information, there might even be diseconomies of scale in banking. The present crisis provides a case study. The desire to make loans a tradable commodity led to a loss of information, as transactions replaced relationships and quantity trumped quality. Within the space of a decade, banks went from monogamy to speed-dating. Evidence from a range of countries paints a revealing picture. There is not a scrap of evidence of economies of scale or scope in banking – of bigger or broader being better – beyond a low size threshold.12 At least during this crisis, big banks have if anything been found to be less stable than their smaller counterparts, requiring on average larger-scale support.13 It could be argued that big business needs big banks to supply their needs. But this is not an argument that big businesses themselves endorse, at least according to a recent survey by the Association of Corporate Treasurers.14 Take Grameen Bank – not a household name in the UK, I realise. This grew out of a microfinance project in Bangladesh which began in 1976.15 Grameen operates as a set of local credit cooperatives, often comprising as few as five members. The bank’s relationship with its borrowers is bound not by legal contract but by trust.