Plenty of excuses have been wheeled out to explain why banks are lending less than last year – none especially convincing
There used to be a TV ad for Heineken that boasted that it refreshed the parts other beers could not reach. The Bank of England’s funding-for-lending scheme has the reverse effect: it refreshes only the mortgage market and leaves the rest of the economy untouched.
Indeed, the data for FLS since its launch in August 2012 has been so poor that it is tempting to say that between them, Threadneedle Street and the Treasury, they could not organise the proverbial knees-up in a brewery. Whatever the scheme has been, it has not been the magic elixir to restore life to the slow-moving UK economy.
Predictably, plenty of excuses have been wheeled out to explain why the banks are lending less than they were this time last year despite pocketing £16.5bn in cut-price credit from the Bank. None of them are especially convincing.
Excuse number one is the defence mounted by those running high street banks when challenged to explain why they are lending less to small and medium-sized businesses, a key target when the FLS was being drawn up. This is not a problem of supply, the banks say, it is caused by a lack of demand. We would like nothing more than to extend barrow-loads of finance to entrepreneurs if only they would ask for it.
But if this argument is true, why are alternative forms of credit – peer-to-peer lending, for example – booming. It appears there is demand for SME lending, but that businesses have given up on the banks. Conclusion: we have a banking system not fit for purpose.
Excuse number two is that used by the Bank of England and the Treasury: we always knew that FLS was going to be a slow burner so be patient and lending will start to pick up later in the year. Yet if that was the case, there would have been no need to make the scheme more generous, as the chancellor did last month by extending the scheme until 2015 and providing even bigger sweeteners for banks that lend to SMEs.
Even now, there is no obvious reason why they should. Lending to small businesses is riskier than lending to homeowners and banks are seriously risk averse at present. Conclusion: there is a need to speed up plans for a business bank.
Excuse number three is that things may be bad but they would be even worse without the FLS. This is hard to square with the Bank’s data, which shows that lending, which was growing this time last year, is falling. Conclusion: this is not an effective way of refreshing SMEs. It is a small and flat beer.