This is an excellent, MUST READ, article in the Economist.
A brutally frank and harsh summary might read:
It’s still the banks stupid!
Bank finance to businesses is one of the fundamental weaknesses of the UK economy. Business funding is required to finance investment and growth, in an increasingly globally competitive market place.
The article highlights how business finance is still seriously depressed across important sectors.
Banks prefer the simplicity, profitability and low risk of consumer finance, especially domestic property mortgages which now have Government guarantees. All of these loans are easy to service, with credit scoring and relatively junior call-center staff. Of course, the Economist article recognizes that real growth cannot be generated from consumer finance alone.
Meanwhile, business finance requires greater expertise to analyze business plans, risk analysis and commercial judgement. Speak to any small business owner about their experiences since 2008, and they will tell you that the banks are excessively conservative, putting too much weight on rules and regulations and not enough on knowing the client and the client’s business.
Being candid, another robust view to summarize UK bank commercial lending might be:
Commercial departments of banks are full of bureaucrats, with no knowledge of their customers nor their businesses and very little authority to back their judgement.
The Economist rightly concludes that Mark Carney, the new head of the Bank of England must give urgent priority to commercial lending.
However, I feel that the Chancellor of the Exchequer, George Osborne has been seriously remiss too. There is an overwhelming economic case for the Government to deploy fiscal tools to get businesses growing again. For example, capital spending should be 100% deductible, with a multiplier. For example, a £100,000 investment in year 1, could generate a tax deductability of say £200,000 or £300,000 against profits in year 1. Similarly, special fiscal incentives are required to stimulate language training, especially Mandarin.
Let me conclude by asking two open questions:
- Do you agree that commercial departments of banks are full of bureaucrats, with no knowledge of their customers nor their businesses and very little authority to back their judgement?
- How do you suggest that the BoE and the Chancellor stimulate growth in UK businesses, especially small and medium-sized businesses?
- Mark Carney’s low interest rates pledge sends the pound yo-yoing (standard.co.uk)
- Bank of England chief hints at linking interest rates to unemployment (standard.co.uk)
- Carney Bemoans All-Male Rate-Setting Committee at BOE – Bloomberg (bloomberg.com)
- Revealed: Mark Carney’s festival weekend – with his very grand in-laws (standard.co.uk)
- Buy-to-let fuels house price boom (theguardian.com)
- UK: Jobs and inflation link to rates? (eadt.co.uk)
- Bank of England links interest rates to jobless target (theguardian.com)
- Bank of England is acting like the Taleban over bank regulation, says Vince Cable (thetimes.co.uk)