UK might follow on US’ Community Reinvestment Act

From The Guardian:

Plans to force Britain’s banks to pump money into poor communities in exchange for their massive taxpayer bailouts are being drawn up by the Treasury, a senior minister has revealed.

Liam Byrne, chief secretary to the Treasury, said last week that the time was ripe to consider a UK version of America’s Community Reinvestment Act, introduced in the 1970s to prevent banks abandoning deprived areas.

The chief secretary added that there were two issues that worried him and his Treasury team – the lack of any hard evidence that particular communities were being frozen out by the British banking industry, and concerns that CRA-induced lending to poor households in the US had triggered the sub-prime crisis.

Couldn’t help but remember the idea of micro-financing and Nobel Peace Prize winner Muhammad Yunus’ business model.  I would support UK Treasury’s idea but only to the extent that it actually follows the concept that made micro-financing successful in the parts where it was implemented.  The huge loans made by banks are without a doubt at the heart of the current crisis.  And if allowed to function the same way in the UK, I doubt the possibility of it being successful.

Looking at micro-financing, there were no significant amount of loans made and they are made to a bigger number of people so the risk (attached to these small loans) is distributed.  And borrowers don’t have to follow a certain term by which they have to return the money nor are they subject to killer interest rates.  The subprime mortgage crisis is precisely caused by the opposite of those things- huge loans, strict period for payments, and the adjustable rate of mortgages.

So I don’t know.  We have to hear first the plan of UK Treasury before criticism is served but if that doesn’t work, there’s always benefits to doing micro-financing instead.

Source: Guardian

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