Lending really is tighter now

The banks, having lost a pile of money largely through their own stupidity, are now tightening up their lending terms. The price is going up, the banks want more security, they are cutting back on the amount they want to lend and, if you are not an established customer with a good track record, they will probably suggest you take your business somewhere else.

This emerges clearly from a survey of corporate clients and others published this week by the banking group KBC. A majority of companies have either already experienced tougher conditions or expect them. They talk of restricted lending criteria, tougher covenants, greater concern with risk and tighter scrutiny, conveying a general impression that the banks are short of cash.

What this means is that the credit crunch is moving from a theoretical problem on the financial pages to realworld actions that can only constrain economic activity. Tightening credit terms to the innocent as well as to the potentially guilty is the mechanism through which the banks' mistakes translate into a wider economic slowdown, and it is now under way.

Counter-intuitively, the other thing that comes through from the survey is the time-lag. Though they are not in the majority, a substantial proportion of the finance directors and others polled don't expect things to change much.

This could be because most of them are under 45, have never seen a credit crunch before and don't realise what is coming down the track at them.

They will soon learn, no doubt, just how thuggish banks become when the chips are down. But it is only fair to note that this does not happen overnight. It takes time to work through the system and it could be autumn or even early next year before we can get a proper fix on how far the banks have pulled back.

Today's preoccupation is, of course, with the Bank of England's monetary policy committee and its decision on short-term interest rates. Writing 75 years ago, Keynes described interestrate cuts as pushing on a string, when the core problem was a lack confidence in the economy and a consequent lack of trust between banks and customers.

The survey is a timely reminder of how confidence is crumbling and in consequence how the banks are raising the bar before they agree to lend.

PLUMBING is boring, but plumbing matters. The leading investment banks are fed up with dealing with the established futures exchanges and have decided to build their own, which they have called Project Rainbow.

You can't really blame them - not so much because of poor service offered by Liffe in London or Eurex in Frankfurt, but certainly in anticipation of the monopoly in America where the Chicago Mercantile Exchange has just launched a bid for its only serious rival, the New York Mercantile Exchange. So there is no reason to doubt the seriousness of the banks' intentions with Rainbow.

So far, so good. More or less the same banks have successfully launched (and sold) Project Boat, which deals with trade reporting and information, and they keep promising that one day we will see Turquoise, the trading platform they hope will rival the Stock Exchange.

Their problem with Rainbow, however, is that it will only be as good as the clearing agent it uses because clearing is where the real money can be saved. Inside the clearer's black box lie all manner of possibilities, but most of all it offers netting - the ability to allow investment banks to offset their positions across all manner of markets so they only allocate capital or margin against the net amount outstanding.

Rainbow can challenge existing markets such as Eurex and Liffe provided it buys the right computer, but it can't work unless it can get access to a proper clearer, and that in effect means LCH.Clearnet, formerly known as the London Clearing House. No problem there, you might think, because unlike the clearer in Chicago or Frankfurt, LCH is a standalone facility offering its services to all markets and totally committed to open access and a free-for-all.

It helps that this is the policy espoused by Charlie McCreevy, the EU Commissioner with responsibility in this area - even though a memorandum signed up to by Europe's clearing houses to allow each other access so the whole market would become competitive has so far been largely ineffective.

However, open access remains the theory - except that in this case Liffe is one of LCH's biggest clients, and Liffe owner Euronext is one of it biggest shareholders, albeit one that has drastically reduced its holding in recent months. Nevertheless, the $64,000 question is whether LCH agrees to open its doors to Rainbow - a rival to its biggest customer.

It is hard to see how LCH can refuse to give access to Rainbow, given that it is committed in principle to clearing for anybody. But life (or in this case Liffe) is never that simple, and it is hugely worried that doing what it feels it should do risks alienating its major customer - which might then look to take its business elsewhere, though where that would be is the question. So, much angst on the LCH board - where inevitably there sit several of the investment banks that are also backing Rainbow.

We shall see what happens, but should not lose sight of an important principle underneath. Traditional exchanges are costly, though much less costly and inefficient than they were, because they still have a lot of baggage and legacy issues. New computer-driven trading platforms in theory offer cheaper alternatives, provided they can attract sufficient liquidity - which admittedly remains a major challenge.

So if Rainbow, and indeed Turquoise, can be made to fly, there is no reason why, in a relatively short time, those and others like them should not displace conventional exchanges. But that will only happen if they can get sophisticated clearing - such as that offered by LCH. Without it, the game is not really worth the candle.