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Mervyn King has become ever more outspoken as he nears the end of his stint at the Bank of England. This week he told parliament’s Commission on Banking Standards that RBS’s current structure was a ‘nonsense’ and that the bank should be broken up. This, he argued, would stop the bank’s efforts to shrink its operations from being a drag on the economy and would lead to a boost to lending, particularly to small- and medium-sized businesses.
There are many who disagree with Sir Mervyn – not least George Osborne. But what is unarguable is that credit provision, particularly to small businesses, is still woefully poor. Data from the British Bankers’ Association released on Monday show that, even taking into account seasonal variations, the picture for business borrowing is bleaker than it was 12 months ago. New loans to small businesses fell to £1.5bn in the fourth quarter of 2012, compared with £1.6bn for the same period in 2011. New loans to medium-sized companies fell to £3.6bn, from £4.1bn. The annual rate of growth in the stock of lending to UK businesses – which historically averages between 5 to 6 per cent a year – hovers around zero, as it has done every year since 2009.
The reasons why banks are still holding on to their purse strings so tightly are well known. Five years after the financial crisis began, they are still averse to risk, and new regulations on the amount of capital they must hold mean risk aversion is now enshrined in policy. Banks and businesses also quibble over quite how bad things are. The British Bankers’ Association says eight out of 10 loan applications by small businesses are approved, and for medium-sized businesses the number rises to nine out of 10. The Federation of Small Businesses says there has been little improvement over the past year, that as many loans are rejected as are approved and that more businesses are being refused finance now than at the start of 2012.
The government’s attempts to improve the supply of credit have had little success. Its funding for lending scheme, which makes cheap loans available to banks for up to four years, has been underutilised since its launch last June. The 39 banks which are members of the scheme – accounting for four-fifths of UK lending – have drawn only £14bn from the £68bn potentially available. And it has not led to net lending turning positive. Lloyds has drawn £3bn of FLS funds but has shrunk lending by £5.6bn. RBS has drawn £750m and reduced lending by £2.4bn, while Santander has drawn £1bn but its lending has fallen by £6.3bn. Barclays’ record is better – it took £6bn of FLS money and has made £5.7bn of additional lending since the scheme was introduced – but in the last three months of 2012 net lending by all FLS participants was negative to the tune of £2.4bn.
Whatever the merits of the funding for lending scheme – and it is quite possible that net lending would have fallen further without it – the government’s approach to the problem is wilfully narrow. Lowering the price of loans, as the FLS does, addresses only one of the challenges facing many businesses. Onerous loan terms and the need to provide guarantees, for example, may prove a greater obstacle even than affordability.
Many small- to midsized businesses argue that, instead of temporary funding schemes, more ambitious changes are necessary. Vince Cable, business secretary, is one of several voices arguing for the creation of a business bank along the lines of Germany’s KfW or the Small Business Administration in the U S. A closer-to-home solution is also worth exploring. Why have mortgage rates come down, and mortgage borrowing gone up, but lending to businesses not picked up? One reason is that there is real competition between mortgage providers in the UK, whereas the big banks still have a stranglehold on the business lending market.
Over a decade ago, the Cruickshank report on competition in UK banking found that banks were making substantial excess profits from their SME customers. Little progress has been made since then – indeed the number of banks has actually shrunk. Creating genuine competition in the banking market should be the government’s next task – and breaking up RBS could be a good start.
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