UK growth hobbled by overambitious banks Zombie companies used to be regarded as a strictly Japanese phenomenon. According to R3, a UK insolvency industry trade body, one in 10 British businesses are now zombies, being kept alive by ultra-loose monetary policy and forbearance by banks that are reluctant to write down loans. At the same time the Bank of England, in its latest inflation report, has expressed concern that the combination of forbearance by banks and low interest rates may have allowed unviable businesses to continue trading. This makes an interesting sequel to my point here two weeks ago about the damage that ultra loose monetary policy had wrought on the supply side of the Japanese economy. In effect, it helped freeze the existing industrial structure and caused resources to be misallocated. The authors of the UK inflation report now argue that the financial crisis may have prevented finance and other resources from being put to their most productive uses within the economy and then impeded the reallocation of capital as the economy restructures. Supporting evidence comes from the fact that net rates of return across sectors, relative to their 1997-2007 averages, have diverged since the crisis, indicating that capital is indeed being inefficiently allocated. The behaviour of zombie companies could provide part of the explanation for the British productivity puzzle, whereby dismal productivity performance has been accompanied by a surprisingly buoyant labour market. Credit has been tied up in these unproductive businesses instead of going to newer companies backing innovative products and processes. Differences in banking structures and behaviour are surely also an important factor behind the contrasting performances of the US and UK economies since the crisis, with UK output still not back to the pre-crisis level. While the US has now settled down to a real growth rate of about 2 per cent a year, the UK economy has barely grown over the past two years. Britain is paying a high price for the international aspirations of its banks. Three-quarters of UK banks" losses in the crisis were incurred in their international operations. As Ben Broadbent of the Bank of England's Monetary Policy Committee has pointed out, because banks then came under pressure to shrink their balance sheets at home as well as abroad, these foreign losses added to the contraction in domestic credit supply. Through the international exposure of its banks, he says, the UK has, in effect, been a net importer of the financial crisis. This brings quite a sense of déjà vu. From Midland Bank's disastrous acquisition of Crocker National Bank in California in 1981 to RBS's recent purchase of ABN Amro via HSBC's venture into the Household subprime mortgage business in the US, to name but a few, British banks have amply demonstrated the intractable difficulties of acquiring and managing overseas assets. Japanese banks that are filling the gap left by retreating European banks in Asia would do well to take note. At the same time the British banking system suffers from being far too concentrated. That concentration has been increased since the crisis, exacerbating the "too big to fail" problem. Banking is too London-centric, which means banks are less sensitive to local conditions than they should be. And there are far too few exits and entrances in British banking, where competition remains imperfect. All of which is in marked contrast to the US, where there are still strong regional and local banks, a relatively high rate of bankruptcies and fewer barriers to entry. In his speech to Occupy Economics, Andy Haldane, executive director for financial stability at the Bank of England, saw no silver bullet for this problem. But he pointed to good signs such as proposals to put core banking services into a shared utility, storing client account details. Banks could have access to the shared data when offering deposits and loans, while customers would find it easier to switch accounts and find products on the shared network. Costs of entering the market would be lowered. There are, at the same time, a number of technologies coming into banking, ranging from mobile payments to peer-to-peer lending, crowdfunding and invoice financing. One of the more heartening developments highlighted by Mr Haldane is the arrival of Handelsbanken, the Swedish bank, in Britain, which is opening one branch every two weeks to offer basic retail and small business services. Its website boasts that as a Handelsbanken customer you only ever deal with people you know by name and the decisions about your banking are made by your local branch. It even claims to do ethics. Maybe a modest amount of creative destruction is happening in a world otherwise strewn with zombies.