What’s Killing Productivity? Some Think It’s the Banks

LONDON—The birthplace of the industrial revolution is in dire need of innovation. Standing in the way: Britain’s mortgage-laden banks.

The U.K.—inventor of the factory system, steam engine and passenger rail—is at the forefront of a 21st-century global productivity slowdown. Growth in U.K. productivity, or output per hour worked, has halved since the financial crisis, leading some policy makers to call this era Britain’s lost decade. Among the world’s seven largest developed economies, only Italy has fared worse.

The causes are hotly debated, and include an ageing population, tighter regulation and the U.K.’s departure from the European Union. But a factor that has gained special attention: the way U.K. banks have tilted lending to the booming housing market.

Bank lending for projects that boost economic output, such as machinery and software, has stagnated. Research and regulators say the two trends are linked: As real-estate prices soared, banks shifted more capital toward housing, viewed as less risky because the loans were backed by tangible assets with rising values.

“The banking system is increasingly becoming a brake on the economy,” said Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee.

The U.K. is an extreme example of what’s happened in big economies around the world for the better part of this century. Central banks cut interest rates in the 2010s through early 2022 to make it cheaper for businesses to borrow and invest. But while debt rose sharply, most of it went toward real estate.

The world’s total assets—including those held by households, businesses and banks—more than tripled from 2000 to 2020, according to a report from the McKinsey Global Institute, a research group. Two-thirds are stored in real estate; only a fifth are in productivity-boosting assets such as factories, equipment and infrastructure, McKinsey said. “The historic link between the growth of net worth and the growth of GDP no longer holds,” the report said.

Among the world’s 10 biggest economies, the U.K. is tied with France for having the lowest share of net worth in assets that boost economic growth. Meanwhile, the U.K.’s home values and mortgage debt have exploded.

U.K. banks added £400 billion, equivalent to about $500 billion, to home lending in the decade through this February, Bank of England data show. Debt extended to businesses grew by only one-tenth of that amount.

The U.K.’s big banks “pulled back in the financial crisis and never really came back” in terms of business lending, said Richard Davies, a former regional head for Barclays’s U.K. business banking operations who now leads Allica Bank, a London startup that lends to small and midsize businesses. “The big banks are obsessed with residential mortgages.”

The obsession with mortgages leaves some businesses feeling sidelined.

Geometric Manufacturing, based in Tewkesbury, England, makes defence and cybersecurity products. Several years ago the firm asked a U.K. bank for a loan to design and manufacture a robotic arm to load its machines, an investment that would allow the factory to produce more with fewer workers, Managing Director Paul Wenham said.

Despite the option for a government guarantee through a U.K. program to help small businesses, the bank declined to participate, Wenham said. The company eventually received a small loan from a London-based startup lender. The loan came with a high interest rate and was smaller than what the company had sought.

His inability to get a bigger loan delayed the project by years, Wenham said. “We could have been reaping the rewards and benefits so much sooner,” Wenham said.

Dozens of startup lenders have stepped in to fill the void created by the retrenchment of big banks. They provided about half of all new loans to small and midsize businesses last year, government figures show. But they charge high interest rates on business loans, said Mike Conroy, director of commercial finance at UK Finance, the banking industry’s main trade group.

Conroy said the biggest factor behind weak business investment is a lack of demand, not supply. Many entrepreneurs are reluctant to take on debt, or simply don’t aspire to grow, he said. “The U.K. has many small businesses making a great contribution to the U.K. economy and local communities, even though they don’t aspire to be the next Microsoft or Google,” Conroy said.

Research in the U.S. and Australia shows that banks respond to rising home values by shifting capital away from businesses. U.S. banks located in areas with robust housing markets in the early 2000s bubble boosted mortgage lending while cutting business lending, according to a 2018 research paper in the Review of Financial Studies.

In the U.K., rules put in place after the financial crisis force banks to hold higher levels of capital for business loans, which are deemed riskier, than for mortgages.

Matt Hammerstein, CEO of Barclays’s U.K. operations, said banks have increasingly required all borrowers—whether homeowners or businesses—to put up physical assets that the lenders could sell if the borrowers fail to repay. Many business owners refuse to put up their assets, such as homes, as collateral and thus don’t win approval for loans, he said.

“What banks have done over time in order to be able to underpin their risk appetite is to expect entrepreneurs to put more of their own equity at risk,” Hammerstein said. “If you’re lending to a small business, particularly one that has intangible assets, you’re going to want some collateral.”

Default rates among established small and midsize businesses is low—about one in 50 will default in a given year, said Davies of Allica Bank. But determining each company’s risk—and thus what interest rate to charge and how much capital to hold—is less accurate and more time-consuming for big banks, which have instead shifted resources to mortgages.

In 2018, Jurga Zilinskiene wanted financing to develop software to expand her London-based language-translation business, Guildhawk. The 40-employee company translates documents for companies around the globe.

She asked a big U.K. bank for a seven-figure loan; they lent her a fraction of that, citing her lack of tangible assets that could back the loan if she defaulted. Many of her assets are intangible, such as intellectual property.

She worries that banks are too focused on making a quick profit rather than supporting the long-term health of the economy. “How can I compete with global enterprises in the United States, China?” she asks.

Colin Saint-Vil got his money education at the dim sum cart, over a steamy plate of pork buns and turnip cake.

A friend offered to pick up the whole tab on her credit card, “for the points.” At the time, six years ago, “for the points” meant nothing to Saint-Vil, now a 30-year-old planning manager in Brooklyn, so he pressed for more details. They lingered over the dim sum meal as a larger conversation unfolded about annual percentage rates, credit-card debt, payment schedules and more.

Millennials and members of Gen Z prefer to seek financial advice from each other than from parents or from financial professionals. They don’t like overwhelming spreadsheets and marketing material written in seemingly foreign languages. They don’t trust big banks and institutions trying to sell them on investment strategies—as many were raised around the late 2000s financial-crisis. And, they are not wrong: There is a lot to be learned from comparing numbers with peers—from sharing salaries to talking out big decisions like home or car purchases.

Saint-Vil said when his father was his age, he had already begun investing in real estate, but with property prices now so high and mortgage rates only just beginning to fall, he said he couldn’t imagine being able to follow in his father’s footsteps. He, like many millennials and Gen Z-ers, describe their finances as “fairly good” these days, though they hold a negative picture of the greater economy, according to a new poll of 18 to 29-year-olds from the Institute of Politics at Harvard Kennedy School.

Millennials are still reeling from the impact of back-to-back recessions, all while large bank closures and investing scams dominate the headlines. Younger people report a feeling of “financial avoidance” exacerbated by high inflation and the pandemic-era budgeting.

As of June 2023, Gallup polling revealed a historically low faith in U.S. institutions, with younger generations voicing high skepticism. According to Gallup, only 9% of respondents aged 18 to 34 expressed “a great deal” of confidence in banks; meanwhile, 47% and 28% said they have “some” or “very little,” respectively.

But when it comes to winning back young consumers, these same financial institutions haven’t quite given up, and are rolling out new outreach programs and robo advisors, some of which have helped bridge a connection with Gen Z and millennials, said Keith Niedermeier, clinical professor of marketing at Indiana University. But many young people still say they prefer do-it-yourself investing platforms like Robinhood and Acorns over traditional advisers at more established wealth-management firms.

Andrew Ragusa, a real-estate broker based on Long Island, blamed the twin problems of low housing inventory and high home prices for postponing younger buyers’ ownership. The median age of a first-time home buyer in the U.S. is 35-years old as of 2023, according to data from the National Association of Realtors. That is slightly down from an record high of 36 in 2022, but still two years older than the median age in 2021, which is representative of an ageing first-time buyer trend.

When he talks with younger clients now, he detects a gloomy sentiment. “They try to be optimistic, but the overall sentiment is ‘This is supposed to be the American dream: we get a house and we get some financial security and I just have to have faith it will all work out in the end.’ But they don’t have faith it will.”

Fear and shame around being able to buy or accomplish as much as one’s parents might have financially can crop up when millennials talk to elders about their financial frustrations, said Jodi Kaus, director of Kansas State University’s student financial planning centre, Powercat Financial. She’s found that lessons and advice from friends are often more constructive.

Kaus leads a peer-to-peer financial planning centre that pairs up students to work through financial issues. She works to pair people with similar backgrounds: graduate students with graduate students or international students with international students. Talking with someone only a few years removed from your current situation means you’re better able to internalize the messages and execute on their advice, Kaus said.

“Early on, parents even say ‘Are you sure students can help my child?’” she said. “And I say ‘I am more than confident that they can help each other.’

Sharing money tips and financial know-how with your friends doesn’t only benefit the asker, Kaus said. In the Kansas State University peer-to-peer group, the advice giver also learns a lot from their own position, because sharing their story and bonding with a peer helps them to build their own confidence and belief in their financial acumen.

Lindsay Clark, a 34-year-old director of external affairs in Washington, D.C., recalls one lesson she shared with a friend carrying student loans from pharmacy school. Clark works at Savi, a student loan platform, and she offered to cook her friend dinner while they sorted through his loan repayment options. Long after they’d cleaned their dinner plates, they sat together at Clark’s kitchen island, lingering over a plate of homemade hummus and chatting about everything from financial goals to Costco card benefits.

“Those conversations blossom from the transparency, and the visibility makes both people feel really good,” she said. “That creates better relationships overall.”

When you’re talking about money issues with friends, Clark said, you’re not artificially inflating your salary or pretending to know more than you do. And most important, you’re not worried about their ulterior motives.

“You feel safe in that conversation, knowing their intentions are good and they’re not trying to make money off of you,” she said. “And that’s going to lead to better results, because we’re working with the reality here.”

Skepticism of pronounced experts and criticism of established financial institutions is especially common among millennials and Gen Z, Neidermeier said. Studies show people across generations are much likelier to take a friend or colleague’s recommendation to heart over that of a faceless institution, he said; people who spend time on social media just have a greater opportunity to source those answers and field questions.

“What people say to each other over the picket fence is what is the most influential,” he said.

At a certain point, however, talking solely to friends and peers for your financial lessons can be very limiting, said Sarah Behr, founder of Simplify Financial Planning in San Francisco. Relying on your social circle can also put a strain on those relationships; no one wants to be responsible for your disappointment when a financial decision that worked out well for them doesn’t fit as well in your own life.

Behr recommends tuning into your own emotional reactions when assessing peer advice: does the road map they followed align with your own financial values? Does it put pressure on you to live outside your means or challenge your personal risk tolerance? If the answer doesn’t feel clear, that could be a time to outsource to a financial professional who has no emotional connection to you or your financial status.

“‘People have been telling me do this, but I just don’t know if it’s the right thing for me’—I get a lot of calls like that,” said Behr.

Saint-Vil said he and his friends share tips on what high-yield savings accounts offer the best rates, and when he did his credit card research, he chose a card recommended by a friend. When it comes time to work with a financial adviser or even one day a wealth manager, he’ll likely work with someone recommended through a peer. Behr said close to 90% of her business comes by way of client referrals.

Since that first conversation over dim sum, Saint-Vil has thrown his own card onto the table at meals and shared his knowledge with other pals who look confused.

“I have a real wide range of friends who are in many different financial places, but I would say a rising tide lifts all ships,” he said.

Julia Carpenter is the co-author, with Bourree Lam, of The Wall Street Journal’s “The New Rules of Money: A Playbook for Planning Your Financial Future,” a personal-finance workbook published this week by Clarkson Potter, an imprint of the Crown Publishing Group.

What’s Killing Productivity? Some Think It’s the Banks

Bank lending in the U.K. is going to property rather than innovative businesses

Millennials and Gen Z are turning to peers instead of professionals for financial advice. They don’t trust banks, and they are tired of information overload.