Are banks doing enough for us?

The big question in this week of banking results will be whether the banks are doing enough to support the economy, following all the help they've received from taxpayers.

Of course, different banks have required different amounts and different kinds of aid from the state, depending on how reckless they had been in the boom.

But they've all had some succour in the form of taxpayer loans and guarantees - even those like Barclays and HSBC that didn't need to be wholly or partly nationalised.

So are the banks providing enough credit to hard-pressed businesses and households, such that the permanent damage to the economy from the recession isn't too severe?

This, I am afraid to say, is not an easy question to answer.

For one thing, more-or-less everyone is agreed - from the governor of the Bank of England to the householder struggling to keep up the payments on a 100% mortgage - that part of the reason we're in such a frightful economic mess is that banks lent far too much relative to their capital resources and to their stable domestic funding during the boom years.

So there is a consensus that they should reduce their loans - or their leverage - for the economic health of all of us.

But equally, more-or-less everyone - again including the governor of the Bank of England and those over-indebted householders and businesses - say that this is neither the time or the place for banks to rediscover the virtues of prudence.

They want banks to be like St Paul: good, or in this case less loose with their credit, but not quite yet.

So what are the banks actually doing? Well, as I've mentioned here in recent columns, the overall statistics show that there has been a sharp reduction in lending to business by banks in recent months, combined with what may be an anaemic recovery in mortgage lending.

But what about individual banks?

Today's results from Barclays and HSBC show reductions in the overall value of their loans and investments in the size of their total balance sheets.

In the case of Barclays, the value of its assets has declined from more than £2tn to £1.5tn in just six months.

That looks like a severe reduction in the amount of credit made available. But appearances are deceptive, in part.

A good chunk of that contraction in the value of Barclay's assets is due to a modest recovery in the value of sterling and also a deliberate decision by the bank to reduce its exposure to complex derivative deals.

So what about Barclays' loans to business and residential mortgages?

The chief executive John Varley says that the bank has provided what he calls £17bn of "new lending" in these categories, split roughly 50:50 between business loans and mortgages.

However, that's not the whole story.

Its overall lending to UK retail customers increased just £1.7bn in the past six months.

And as for loans to businesses, they actually fell in total since the end of last December, from £67.5bn to £62.5bn.

So how are these numbers from Barclays' official balance sheets reconcilable with John Varley's claim that the bank is doing more than its bit to keep the economy going in these dark times?

The bank says there has been a sharp drop in the use of overdraft and other lending facilities.

In other words many customers have opted - perfectly rationally, many would say - to borrow less.

Hmmm.

Here's the great and resonant unknown of the moment.

Is the credit contraction a reflection of less demand from you, me and millions of others? Or are the banks rationing much more than they had been doing?

The answer is - probably - a bit of both.

That said, in the end we are lost if we don't trust the numbers, and the numbers say that the banks are cutting the provision of credit as defined most broadly.

It's inevitable, in those circumstances, that some creditworthy borrowers will be starved of vital finance.

But if the government were to direct the banks to lend more, it's also inevitable that some money will be lent to those who will squander it.

In the end, we have to make a choice about which losses are more acceptable: the cost to the economy today of fundamentally sound businesses that go needlessly bust because they are being starved of credit, or the future cost to the economy of weak businesses that would be propped up if government forced banks to lend to all and sundry.