The GDP of the UK economy has fallen by over 9.9% as a consequence of the pandemic. Over 19 energy suppliers went bankrupt, which affected 2 million customers. Unemployment rose by a staggering 0.5%. All of which can be resolved by one economic agent: the bank. There are various changes banks can bring to significantly help to rebuild the UK’s economy and increase economic growth.
Firstly, UK banks should carry out more ‘Fractional Reserve Banking’ for smaller businesses, which would expand the money supply due to the ‘Money Multiplier Effect’. As banks create the majority of the money supply in the UK economy. Therefore, when giving out loans to smaller firms, their decision of who receives the money; how much they receive and what they are going to use the money for, would drastically help to reshape the economy in the short and long term. In addition, this would in return help to increase employment in the UK and would also result in more UK Citizens having more disposable income, which they can spend in the market, resulting in positive economic growth for the UK.
However, the majority of large UK banks mostly lend money to large businesses regarding higher profits for the bank. So, to reduce the negative impact of the pandemic, larger banks such as HSBC and Barclays should increase their loans to be given out to smaller businesses. As, not only in the UK but throughout the world, small businesses are the major reason why unemployment decreases and the economy grows. Hence, if these small businesses aren’t being given loans to help them boost their output in the market and give a positive impact on the UK economy, then the UK economy won’t recover from Covid-19 as easily. Since the pandemic, over 1,446 small businesses have failed which is substantially 56% higher than the same month last year.
Although, giving out loans to smaller businesses may be riskier in the short term, especially during a pandemic. But unprecedented times like Covid-19; are when small businesses need these loans the most. This is why banks should give loans to small businesses which have the potential for highly productive growth in the long term for the UK’s economy. Even if it doesn’t give the banks much profit, it would certainly improve the UK’s economy. The productive value of a small business can be determined if it implements new technologies, has a great range of goods/services; or have a sustainable business model for the future.
Furthermore, another major change banks could do, and many did, would be to decrease the interest rate on loans. Regardless, of whether it’s a mortgage, personal or car loan. All interest rates should be cut down significantly, which would give an incentive to citizens to borrow more money, as it would allow the economy to keep growing and would prevent stop the UK economy from being ‘stuck’ during the pandemic. As of 19th March 2020, the Bank of England cut their interest rates to the ‘Bank Rate’ at 0.1%. This encouraged many businesses and citizens to take out loans, as they were saving money. However, banks should only use the ‘Bank Rate’ for a short period ranging from 6-12 months with a slight increase in the interest rate, to restore confidence in the people ensuring that the economy is rebuilding at a steady pace. As the famous economist, Maynard Keynes stated, many people during uncertain times would ‘hoard’ their cash, which did occur in the pandemic, resulting in negative economic growth. So only lower interest rates won’t restore the economy, which is why the UK government would need to borrow money and increase government spending not decrease it.
But the government should not fund their spending by selling bonds, they should borrow money from banks through loan contracts, which are non-tradeable and therefore would expand bank credit creation. This is essential for economic growth as now this gives business to the banks, which results in more money creation. Also, as the supply of bonds is stopped this would give a positive impact on the Bond market, which would result in the prices of Bonds increasing.
Additionally, UK banks can do ‘quantitative easing’ where banks can buy an increased amount of non-financial assets like government bonds where banks, own a large amount of these bonds can decrease the yield; giving many other private investors less incentive to hold onto their bonds and encouraging them to invest into riskier assets that would give them a higher return on investment. Thus, these investors would invest in alternative assets such as index funds, stocks or higher-yield corporate bonds after selling their government bonds. This would help the stock market to prosper and improve the capital market conditions. After the economy recovers from the pandemic, banks should reverse quantitative easing, by gradually selling the assets back into the market. The timing of this change is essential for the UK economy to remain stable and prevent any disastrous consequences such as inflation or even worse, hyperinflation in the British Pound.
In conclusion, banks can give a huge positive economic impact on the UK economy. Ensuring that all of these major changes should consider the negative impacts if they are imposed for an extensively long period. It could harm the UK’s economy in the long run. Firstly, by lowering interest rates and giving more priority by lending money to smaller businesses; provided that they have high productivity and can produce goods/services which can benefit the economy. Secondly, having some government intervention that directly helps banks by borrowing money through loan contracts, not by selling bonds. Lastly, quantitative easing, where banks can cause private investors to invest their money in riskier assets would all cause high economic growth and result in a faster recovery for the UK economy, post-covid.
By Anshjeet Singh
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