Sunday, July 10, 2005

Why rob banks?

"Because that's where the money is." - Willie Sutton, American gangster.

If Willie were alive today, he would need to change careers. Many banks will soon be losing lots of their shareholder's money as they seem determined to repeat past lending mistakes and suffer the indignity of massive bad debt write-offs.

In pursuit of short term profit targets, Datamonitor reports that banks are having to take higher risks to earn the same return by relaxing their lending criteria to people with poor credit histories or those who are self-employed. Whilst it may keep the house price bubble sustained and Gordon off the hook for another couple of months, a lot of this new lending will turn sour, end many banking careers and propel more borrowers into eventual bankruptcy.

As the economy teeters, banks should be tightening their lending criteria, not relaxing it. It only makes the eventual fall more painful.

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