The Bank That Doesn’t Lend
By Simon Thompson, CEO, Chartered Banker Institute
There's been considerable coverage of Monzo's recent, challenging results, and I read last week' FT’s Alphaville column on the subject with interest. Although interest doesn't seem to be something that Monzo itself is terribly interested in - as Alphaville demonstrate, Monzo is "the bank that doesn't lend":
Similar criticisms could be made of some of the other new, digital challengers in the UK and indeed internationally – although the Bank of England points out that in 2019, 10% of new business lending was attributable to the non-big six banks. That was before Covid-19, however, since when (again, according to the FT) the UK’s major banks have issued more than 80% of CBILS and bounce back loans, dominating the lending market.
I'm not picking on Monzo; in fact I should declare an interest as a current account customer for 3 years now - joining to see what the hype was and remaining as a very happy (if infrequent) user of the excellent Monzo app. But the Monzo figures are stark - lending just 7% of its £1.4bn in customer deposits. Half of that lending was customer overdrafts (Alphaville point out the sizeable provision the bank has taken against these), meaning that "real" lending - of the type we'll need to support individuals, families and businesses in hard times - was less than £60m.
The FT makes the point that perhaps this is because lending (or at least lending prudently, and profitably, and recovering advances) is more difficult than many entrepreneurs starting a bank think – and is going to become much, much more difficult in the months and years ahead. Perhaps Monzo lacks the culture and expertise necessary, and – wisely – hasn’t rushed into a market they don’t understand. Credit skills have not been given the focus needed in recent years, and many institutions are finding that automated credit decisions are of little use in current conditions. A point underscored by Sarah Breeden, Executive Director for UK Deposit Takers Supervision at the Bank of England, who in a speech last month to the chairs of smaller UK banks and building societies said that “Many of the new banks authorised since 2014 seem to have underestimated the development required to become a successful, established bank.”
This all begs the question - what's the point in a bank that doesn’t lend? Can a bank be a simple, straightforward, and safe home for deposits - a new incarnation of the savings banks? How can such a bank be safe, however, if it is not lending to make a return, unless account charging is introduced at a level likely to drive customers away?
Banks, therefore, need to lend. And we need them to lend - or, rather, we need banks to lend prudently, responsibly, and profitably (for themselves and their borrowers) more than ever. Prudent lending to individuals and businesses is hard and requires professional expertise and experience. In fact, it's professional expertise in credit and risk that defines our banking profession. Investing in such skills can seem costly. But the costs of not doing so - and of not lending - are much greater still.