You only have to look at the results of the government’s Funding for Lending scheme to realise there is a problem.
Despite being able to draw down low-cost finance under the government’s borrowing umbrella, the banks have reduced their lending by £12 billion since the scheme has introduced, according to a new report by Phillip Blond’s think-tank Respublica.
The figures underline the basic difficulty: the big banks no longer want to be in the market for lending to SMEs, however much they are beaten and cajoled by politicians to be there.
They no longer have the infrastructure to lend in that market. They have no local intelligence and the alogarithms they use, by way of risk software operated at regional level, tend to rule out most loans.
There is the problem in a nutshell. Despite all the rhetoric, the big banks don’t want to do it. That is why Project Merlin failed and it is why the results of Funding for Lending have been so unspectacular.
What I hadn’t realised until I read the new Respublica report, Markets for the Many, is that the Funding for Lending figures for building societies are completely different: they increased their lending by £15.7bn during the same period.
The problem is that regulation prevents them lending to SMEs. It isn’t surprising, in those circumstances, that loan rejection rates to SMEs in the UK are twice as high as they are in Germany and France.
Markets for the Many suggests lifting those restrictions on building societies and to look urgently at remutualisation legislation.
This is sensible, though since the disaster of the building society demutualisation in the 1990s (see my book Broke: How to Survive the Middle Class Crisis for more), the building society market is very strange – one whale (Nationwide) survives alongside many minnows. It may be that SME lending would only apply to one building society in practice.
Respublica’s other big idea – that building societies should be allowed to buy the new TSB bank, carved out of Lloyds – would certainly apply to them alone.
What is strange is that even the most fervent advocates of building societies seem to have given upon the idea of starting new ones. The Building Societies Association website is not encouraging.
What is encouraging is that Respublica is closely involved in this debate, which goes to the heart of the key to rebalancing the UK economy – providing an effective local lending infrastructure that can use local deposits as local investment.