Over the past three years, bank lending to productive industries — what we might call the “real economy”— has consistently declined, with 2023 seeing a sharp drop of £8.5 billion, according to fresh analysis from research and campaign group Positive Money.
This research reveals a troubling trend: UK banks are prioritizing unproductive lending — favoring financial institutions or funding property purchases — while neglecting sectors that drive the real economy. Net lending to these productive industries has steadily declined, with reductions of £5 billion in 2021, £5.6 billion in 2022, and a further £8.5 billion in 2023. Key sectors such as manufacturing, construction, transport, and retail have all experienced negative changes in net lending during recent years.
As of October 2024, non-financial corporations hold a mere 16.6% of total bank loans, while financial corporations claim a significantly larger share at 23.9%. Alarmingly, when adjusted for inflation, non-financial corporations now hold only half the amount of outstanding credit they did in 2010.
The bulk of credit created by banks is now fueling the property market, driving up the prices of pre-existing homes. Mortgages have surged from accounting for 39% of total lending in early 2009 to a striking 54% by October 2024, reflecting a significant shift in lending focus.
This analysis comes shortly after the government’s call for evidence on its Financial Sector Growth and Competitiveness Strategy, a key element of its new Industrial Strategy. It also follows Rachel Reeves’ recent remarks lauding the financial sector as the “crown jewel of our economy.”
With the vast majority of the UK’s money being created by commercial banks in the form of loans, banks can effectively decide which sectors prosper, and which are neglected.
By overwhelmingly lending to other financial firms and for the purchase of existing assets such as property, the growth model of the financial sector has not changed since the financial crisis, but continues to rely on asset-price inflation rather than growth in the real economy.
Positive Money’s findings contradict the Chancellor’s claim in her Mansion House speech that post-crisis banking regulation “has gone too far”, and is clear evidence of why effective regulation, credit guidance and public investment banks like the National Wealth Fund are required to steer private finance away from speculative activities and towards those that will drive a just transition to a green economy.
