The bank lending paradox and its effect on demand for business finance

Bank lendingBank funding is still proving elusive, particularly for the SME market. The consequences of the 2008 credit crisis and the effects of the ongoing Eurozone situation continue to be felt in our domestic lending markets: the banking sector remains deeply unpopular and under attack from all sides.  A never ending string of operational and cultural failings seems to unravel a bit more every the week.

However, and in defence of the banks, trying to simultaneously shrink their balance sheets, keep more capital, lend more and, in the case of Royal Bank of Scotland and LloydsTSB, increase their share price such that the nation can be repaid, is arguably an impossible task in today’s strained global economy.  It is therefore no coincidence that those with least leverage, ie SMEs and retail customers, are experiencing both shoddy treatment and a lack of credit availability.

It could be argued the Banks are in a no-win situation.  Many of the experienced bankers will have seen their reputations going from the person in the community everybody wanted to know, to being embarrassed to give an honest reply when asked what they do for a living!

There is a massive irony here, in that we, with our regulator hats on, are saying that the banks must get their house in order, hold more capital, and be more prudent in their lending.  We have even managed to introduce the term Casino banking into common use to reflect the risky nature of some bank lending methodology.

On the other hand, with our house buying and entrepreneurial hats on, we are saying open the floodgates and lend more money to both the consumer and to business.

It is worth mentioning, there were few complaints in 2005/6 when bank profits (and therefore share prices) were performing very well for all our pension funds!  There was even a period when Fred Goodwin was regarded in almost Messianic terms following his victory over Barclays for the infamous acquisition of ABN Amro.

The fact of the matter is we are where we are; the economy is taking longer to recover than had been anticipated and business funding for the SME is proving difficult to come by.

The Bank of England are doing everything they can to get Bank lending moving.  The latest initiative, the Funding for Lending scheme has now signed up 30 banks, accounting for 80% of UK lending, and they are pinning their hopes on this increasing the flow of funds to the SME.  However, Paul Fisher, executive director for markets at the BoE, warned that even though the programme was helping banks to cut their own borrowing costs – and pass the savings on to households and businesses – there could be no guarantees that more and cheaper credit would be readily available.

Not only do banks have access to virtually unlimited funds under the Funding for Lending scheme, but in addition, as reported in the FT on 10th October, ‘….capital and liquidity rules for the biggest UK banks have been quietly relaxed in an effort to stimulate lending, a move that puts Britain at the forefront of a global experiment to use bank regulation to moderate the economic cycle’.

However, there has to be a demand.

The Bank of England Credit Conditions Survey for the third quarter of 2012 reported that demand for credit from small and large companies had fallen in the three months to the beginning of September 2012.

This is confirmed by the lending Data from the Bank of England which show that loans to private, non-financial companies – which form the backbone of the UK economy and which are of most concern to policy makers – contracted by £0.9bn in August and over the past three months, on an annualised basis, have contracted at a rate of 3.1 per cent.

A recent survey from the British Chambers of Commerce (BCC) found that half of the 1,560 businesses questioned said they mistrust banks and building societies, while 38% said they trust them less than a year ago.

Crucially, it also reveals that 37% of responding firms said they were not confident they could secure external business finance.

This lack of confidence is affecting demand all round.  A recent report by the CBI laid bare the hardship of Britain’s SMEs, which account for almost 60pc of private sector employment. It confirmed that plummeting orders both at home and abroad in the three months to October wiped out confidence.

This is the Paradox: no lending, then no demand for lending, then just no demand!

What do you think?

Image by: Vectorportal