Posted by: John Tozzi on November 16, 2011
Since the 2008 financial crisis, the British government has been much more aggressive than the United States in getting the banks it bailed out to lend to small businesses. Through the Project Merlin agreement announced earlier this year, five U.K. banks agreed to 190 billion pounds of new lending to businesses in 2011, including 76 billion to small and mid-sized companies (a 15 percent increase from the previous year).
The business lending market in Britain is highly concentrated, with just six banks controlling 70 percent of loans, according to the Bank of England. The government still owns a controlling stake in the Royal Bank of Scotland and about 40 percent of Lloyds.
Reports out this week question whether the government’s effort to lean on big banks is working. The Telegraph suggests that banks are hitting their headline numbers but that’s not actually helping businesses. The paper quotes Citigroup analysts saying:
We suspect that, in aggregate, banks are meeting their Project Merlin targets by making credit available at a high price and on tough terms that few firms can afford to meet.
We suspect that the cost and availability of credit for small firms will remain poor unless the government take a far more proscriptive and forceful approach to the banks…
Meanwhile, The Guardian says the figures count credit lines that haven’t been used, which means the actual amount of credit businesses are using is less:
Merlin figures said £56bn was already in the hands of small and medium-sized enterprises. The official stats are lower because they exclude Merlin’s practice of including unused overdrafts in the lending figures. Under the Merlin rules, a facility to borrow is the same as a loan, even when it lies idle.
The chief defence of the banks and their failure to support smaller firms with credit is that much of the shortfall can be blamed on a lack of demand. While the poor business and consumer confidence figures for the last 10 months would dissuade many firms from investing in new plant, machinery or staff, it cannot explain why so many companies with long order books are going out of business for lack of a loan.
The paper doesn’t interview or name any of the companies with order backlogs that are supposedly going out of business because they can’t get credit, however.
The Bank of England’s own report says that demand for credit was indeed down, but small businesses may also be discouraged from seeking loans:
Small businesses and new business start-ups still found it difficult to gain access to credit. …small firms were reluctant to approach banks out of concern for an increase in the cost of existing borrowings, or reductions in overdraft limits, and sometimes had resorted to the use of personal loans instead.
All this is seems to be leading up to something quite unusual: The Chancellor of the Exchequer (equivalent to Treasury Secretary) is reportedly preparing for the government to lend billions directly to small businesses.
Chancellor George Osborne floated the idea last month, saying at the time:
It could help prevent another credit crunch, provide a real boost to British business and over time help solve that age-old problem in Britain: not enough long-term investment in small business and enterprise.
Osborne is expected to announce details at the end of the month.