Dominic Lawson: Our banks are doing a good job

It's a myth that banks are not lending to small businesses

Related Topics

No one ever felt sorry for a banker. It's just not done. After child-molesters, there is no easier target for politicians and the press. This week, as the big financial firms report their profits for the first half of the year, we can expect the usual seasonal surge in bank-baiting. In fact, it has already begun, fuelled by complaints that the banks have gone on a lenders' strike, and are thus betraying all of us, who as taxpayers have bailed them out. The ingratitude of it!

Thus the Daily Mirror, on the left, has referred to the £7bn which the big five banks are expected to announce by way of profits, as "Robbery"; meanwhile, on the right, the Daily Mail has launched a campaign under the slogan "Make The Banks Lend". The words "Or Else" are implicit.

If you think about it – always a good idea – the very fact that the banks are (on the whole) making substantial profits proves that they have been busy lending. Those profits come from the fees people pay in order to borrow from the banks. Ah, say the banks' critics, but that has come only from lending to very big companies: they have completely closed new lending to smaller businesses. This point was made explicitly on the BBC's Today programme by a former banking analyst, Ralph Silver, who seemed unable to raise a loan to fund his new research company: "There is simply isn't any money for small and medium sized businesses – the banks just aren't doing it."

Obviously Mr Silver hasn't received the loan he wanted; but it is absurd, especially for a banking analyst, to generalise so grotesquely from personal experience. Yesterday, on the same programme, Peter Ibbetson, the head of small business lending for RBS, stated, as a matter of fact, that "we are approving 17 out of 20 applications that come to us, [including] about 2,000 start-ups every week".

If you are so distrustful of bankers that you think Mr Ibbetson invented those figures, go to the Department for Business for confirmation: that arm of the state's own data show that, apart from a reduction in the second half of 2009, there have been no declines in lending to small businesses, but in fact a steady, if unspectacular growth. Even more pertinently, the Bank of England's most recent Trends in Lending bulletin notes: "In some contrast to the continued contraction of the stock of lending to businesses in total, the stock of lending to small and medium-sized enterprises has risen slightly over recent months."

That has not stopped the Governor of the Bank, Mervyn King, from telling MPs last week that it was "heartbreaking" to see how many small businesses were going under because lenders refused to supply them with the funds they needed. At the weekend he was backed up by the Chancellor, George Osborne, who told The Sunday Telegraph that "every small and medium-sized company I have visited in recent weeks has had some problem with their bank – either they have found it difficult to renew their overdraft or they demanded additional collateral, often someone's house".

Each of these two men has a particular reason for wanting to stir the banks into lending more. Mervyn King is determined that the Bank will not indulge in any more "quantitative easing" – printing money, in plain English; and the best way of averting the pressure to do that is if there is an increase in the velocity of money already in circulation. George Osborne, meanwhile, has staked his entire economic strategy on the proposition that the private sector will supply the growth to replace public-sector employment, as his expenditure cuts take hold. I think this is the right strategy – but there is no doubt that it requires a degree of optimism from the banks in their lending to the private sector if it is to work as Mr Osborne wishes.

It is, however, striking that neither King nor Osborne has deigned to give any particular details of their general proposition. I spoke yesterday to Angela Knight, the chief executive of the British Bankers' Association; she was hotfooting it to Mervyn King's office, in order to find out the precise circumstances of the "heartbreaking" cases the Governor cited. Doubtless she will then be moving on to the Treasury, to get further and better particulars from Mr Osborne.

To take the Chancellor's two criticisms in turn: there is no surprise that businesses are finding it more difficult to get a straightforward overdraft. The banks have been issued with warnings by both regulators and government to provide more capital safeguards against loans which might default. Since unsecured overdrafts to small businesses are the most vulnerable to default, it follows that the banks have actually been disincentivised to provide them.

This leads on to Mr Osborne's second objection: that it is somehow outrageous that companies are being asked for more collateral, not excluding the borrower's house. Is that so very outrageous? Obviously every small business would like not to give any security for a loan; but why should banks risk Mrs Jones's savings to extend an overdraft to Mr Smith's start-up business, if Mr Smith refuses to offer up anything by way of security? In many cases, the bank would be prepared to lend to Mr Smith's start-up, if Mr Smith were prepared to yield them – or other backers – a slice of the equity; but no, Mr Smith wants to keep 100 per cent of the equity, and finance his growth entirely through unsecured credit. Well then, the price of that loan will reflect his desire to keep all the equity risk.

In the end, though, Mr Smith is not the most important person to the banks – nor should he be. The most important person is Mrs Jones, who has deposited her savings with them. It was the Mrs Joneses who were queueing up outside Northern Rock to withdraw their funds when it became clear that the firm had lent so improvidently that it was being starved of credit itself. This is the eternal nightmare of the banks, because their business consists of borrowing short (from Mrs Jones) and lending long (to Mr Smith).

Leave aside those financial mechanics, there is also a quasi-moral issue, best captured by Ronald Grierson, one of the few surviving close colleagues of that great banker Siegmund Warburg. In late 2008, when the then Labour Government was haranguing the banks in exactly the way George Osborne is now, Sir Ronald wrote the following marvellously terse letter to the Financial Times: "A bank is a bank and if the security of its depositors is not its main concern, it should be required to adopt another name. Members of the public are entitled to take this for granted."

As it happens, Mr Osborne, via the Treasury, has a controlling stake in two of the nation's largest banks. He could, without any recourse to legislation, compel Lloyds/HBOS and RBS to relax their lending conditions to businesses. So why doesn't he do that? Not least because if he drove them back into the lax lending practices of the boom years, then he could kiss goodbye to the prospect of selling the government stakes in those banks at anything other than a vast loss to the taxpayer.

Yes, British banks are by no means perfect – they will inevitably turn down some proposals which deserve support; but the idea that politicians or newspapers would be better at assessing individual credit risk is the craziest business proposition of all.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Sustainability Manager

Competitive: The Green Recruitment Company: Job Title: Scheme Manager (BREEAM)...

Graduate Sustainability Professional

Flexible, depending on experience: The Green Recruitment Company: Job Title: T...

Business Project Manager

£350 - £400 Per Day: Clearwater People Solutions Ltd: Project Manager job vaca...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Day In a Page

Read Next

Commonwealth Games 2014: Speak out against homophobia, Mr Salmond

Peter Tatchell

Prince George's birthday is a pleasant distraction, but the monarchy still makes me feel uneasy

Simon Kelner
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

Meet the people who play with Lego for a living

They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

20 best days out for the summer holidays

From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
Open-air theatres: If all the world is a stage, then everyone gets in on the act

All the wood’s a stage

Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
Rand Paul is a Republican with an eye on the world

Rupert Cornwell: A Republican with an eye on the world

Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
Self-preservation society: Pickles are moving from the side of your plate to become the star dish

Self-preservation society

Pickles are moving from the side of your plate to become the star dish
Generation gap opens a career sinkhole

Britons live ever longer, but still society persists in glorifying youth

We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor