Dominic Lawson: Our banks are doing a good job

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

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.