Why is it that, even after the worst financial crisis in our history, after countless examples of wrongdoing and some flagrant examples of fraud, of blatantly excessive rewards for underperformance, we are still so reliant on our big banks?
It is hardly a new question.
Back in the wake of the 1930s, one of the most popular books about the Great Crash, Where Are The Customers’ Yachts by Fred Schwed, examined why it was that it was always the bankers and financiers (rather than the customers) who managed to make the most money, even after the crash.
Clearly companies, like individuals, need to borrow in order to invest – whether to build a new factory, to employ an extra staff member or to pay for the raw materials they will then turn into a finished product.
On paper at least, finance is supposed to be akin to a utility. The clue is in the technical term for what they do: financial intermediation.
The role of banks is to provide a conduit (to intermediate), connecting those who want to borrow with those who want to lend.
As social lending and microfinance have proven, it is quite possible to connect borrowers and lenders without a bank in the middle.
And yet, somehow, in this country at least, banks remain indispensable.
Between the start of 2003 and the end of 2007 – in other words the five years preceding the crisis – British companies borrowed a whopping £197bn from UK banks.
In theory, they could have raised that money by issuing bonds or shares instead, but Bank of England figures show they raised a net total of only £6.7bn in capital (bonds and shares).
In other words, Britain’s companies have been extraordinarily reliant on banks to get their cash – to a far greater extent than in the US, for instance.
Now, certain companies always need to rely on banks rather than selling off bonds and shares – for one thing, many of the smallest companies are too small to afford the regulatory and administrative costs of issuing a bond or shares.
But that doesn’t explain why Britain is so unduly reliant on banks.
What it does explain, though, is why so much is being done – so much anaesthetic thrown in the banking system’s direction – in order to try to get lending going again.
For if you look at what happened to those figures on lending to businesses post-crisis, they look exceedingly grim.
According to Bank of England figures released today, between the end of 2007 and the most recent quarter, British businesses actually paid back £9.5bn to UK banks.
That explains, in pretty short order, why the economy is in so much trouble.
Britain’s companies had enjoyed a flow of financing from the banks equivalent to £107m a day in the five years running up to the financial crisis.
Today it is not merely that they don’t have that money coming in from banks, it is that they are having to pay them back £5.8m a day.
There is some positive news, which is that in response, companies have started to turn to the capital markets, raising £52.5bn in shares and bonds since the end of 2007.
However, and you can see the story in the graph above, this is less than half the total financing they were used to before the crisis.
Moreover, given small businesses cannot easily tap the capital markets, they are not benefiting from this shift away from the banks.
They still need bank loans to keep themselves afloat. And given it is small businesses we rely on to create the majority of net new jobs in Britain, that is why banks are almost invariably kept afloat even after having erred enormously during a financial crisis.
The Government’s trade-off is quite simple: supporting the banking system may well mean some of its members are not punished as severely as they would otherwise have been.
But if that is what it takes to ensure the economy does not tumble into an even deeper hole, perhaps it is worth it?
Or is it?
Some would argue that all of the above is precisely why the Government should be setting up its own bank to lend to customers.
The problem is that, first, it is not entirely clear that they would be any more willing to lend to customers – after all, the drying up of loans is at least partly down to the fact that many lenders fear they will not get their money back because those businesses will go bust.
Second, some would argue that it is not the Government’s role to decide which companies should get money and which ones should not. It smacks, they might add, of 70s style dirigiste policy.
However, the fact remains that the Government has already done precisely this.
It has supported a banking system which would, without its help, have collapsed.
That may have prevented an even deeper economic collapse than happened.
But it means many of those who were responsible for the worst abuses during the financial crisis are not merely still in their jobs, but they benefit from the subsidy the banking system still receives.