Despite the provision to the banks of huge sums by way of Quantitative Easing, very little of that money has found its way into bank lending for productive investment. The excuses trotted out for this failure include the age-old claim by British banks that the comparatively low level of their lending to business does not evidence any reluctance to do so, but merely a shortage of demand – or, to put it another way, a shortage of suitable projects on which to lend. But no sense of this can be made unless we know the terms on which the banks are offering to lend.
And that is precisely, of course, what we are not usually allowed to know. The banks have traditionally been very coy about the terms they offer. But the Bank of England has recently required the British Banking system to make returns showing the extent and the terms of lending to enterprises.
The information that is now available shows that, by comparison with other and more successful economies, our banks lend over a shorter term – in other words, the money has to be repaid faster. The average term loan is now for under two years with a repayment rate of about 65%. This means that the annual repayment costs of bank loans for British firms over the life of the loan are much higher, the adverse impact on cash-flow is therefore more severe, and the need to make an immediate return on investment (and a quick boost to profitability) is much greater.
Annual repayment costs that are several multiples lower than British equivalents are a large part of the reason for the greater amount and ease of bank borrowing enjoyed by businesses in, for example, Germany and Japan, and in the new powerhouses of China, Korea and Taiwan – and that is, of course, why they are able to buy up and make a profit from our failing assets.
This is the origin of the much-lamented British disease of short-termism. Short-term cash-flow or liquidity is at least as important to British firms as longer-term profitability; indeed, it is literally a matter of life and death. It is a factor that both inhibits the willingness to borrow (and therefore the access to essential investment capital) in the first place, and – if the loan is made – greatly increases the chances that it cannot be repaid in accordance with the loan period and terms insisted upon by the banks.
If, as is all too likely, a business borrowing on these terms runs into difficulties before the return on the investment funded by the borrowing becomes available, the news gets worse. British banks, unlike their overseas counterparts, show little interest in the survival of their business customers. Their sole concern often appears to be to recover the loan and interest payments due to them over the short period specified in the loan arrangement. If that means receivership or liquidation – even if the business had a good chance of survival were the investment plans funded by the loan allowed to proceed – so be it. The banks can congratulate themselves not only on the return of the loan and other payments due to them sooner than if the business had been allowed to survive but also on the money to be made from the disposal of the assets (sometimes to foreign buyers) through the receivership process.
Previous attempts to improve the investment funding of SMEs have failed in the United Kingdom, in the face of well-funded bank opposition to any changes to improve the existing situation. The current concentration of 84% of UK bank savings in six banks and the absence of public local banks of the Spakassen type is largely responsible for current failings.
Bank branches in the UK at present act as facilities for collecting local savings and then channeling them largely into London; there is little direction of such savings into local SME investments. There are about 2.3 million VAT-paying SMEs in the UK which receive virtually no support from the branches of the UK banking system except for the standard retail service of a money transfer system.
By contrast, the more successful German economy has seven regional banks, 431 Sparkassen (or local savings banks) and a network of 15,600 branches to provide SME loans from German savings. Each Sparkassen – all 431 of then – concentrate on providing business loans to SMEs in the area where it is located, and each has an interest in, and commitment to, ensuring the economic success of its native village, city or region.
Britain has nothing remotely similar nowadays, but it had such a system until the 1880 Bank Amalgamations were put into effect and destroyed “country banking” and established the English Clearing Banks. As Professor Glyn Davies said in his 1979 evidence to the Wilson Committee “If Britain had had the financial arrangements it has now at the time of the industrial revolution, that revolution would have been still-born.”
This situation is no longer tolerable. If we are to prosper so as to compete with powerful overseas competitors, the banking system must be reformed. Fresh legislation should be enacted to require British banks to operate mainly as one of four separate categories – as retail banks, mortgage and consumer credit banks, merchant banks and investment credit banks. And at the level of the local community, community interest credit banks, having the function of supporting and developing all of the local SMEs, should be created got fulfil that function. And British Community Interest Credit banks (CICs), canalising local saving into local enterprise, are a key part of that restructuring.
The Creation of Community Interest Credit Banks in Britain
The continuation of the existing banking arrangements, in which the merchant bank gambling function is a legally allowable integrated division in Clearing Banks with the rest of the banking business, is not a safe way forward for the British economy, as Mervyn King has regularly warned us all. That was the major cause of the credit crunch, because that structure enabled British Banks to gamble with the savings and the circulating credit of the UK on the international money, stock and bond markets. The “clever” re-packaging of poor quality US housing debt, with the mistaken sale of these mortgages as good quality loans when they were not, was the main item in causing the credit crunch. To avoid the reoccurrence of that event, a major re-structuring of the British Banking sector is required, into retail banks, mortgage and consumer credit banks, merchant banks and investment credit banks. And above all the major factor in the success story of Germany – the Sparkassen local banks, which are focused on the collection of local savings and the use of these to support and enable the success of local SMEs – needs to be adopted in Britain.
All of the previous attempted major innovations to Britain’s financial-industrial structure have foundered on the rock of the lack of local banking support for local companies. While the UK’s six major Clearing Banks effectively drain local savings out of every locality in Britain, out of every city, suburb, town and village in the UK, their local bank branches do not act as taps for industrial investment, as they did at the time of the industrial revolution and as the German local savings banks (the 453 strong, with 12,600 branches Sparkassen) do to this day. The six major UK Clearing Banks have no priority whatsoever for providing long-term capital in relatively small amounts to the 4.85 million SMEs of the United kingdom. There is not a single financial organisation in the UK which has the objective of collecting financial savings and providing it, as required, at local level to the millions of inventive and innovative local SMEs in Britain. Many successive British Governments and their regular reports on the British economy have pointed that out. The most well known of these during the last century was the “Macmillan gap” about the absence of funding for SMEs and the Committee to Review the Functioning of Financial Institutions (successfully renamed the “Wilson Committee” by the British Clearing Banks so as to imply that report was just a socialist recommendation) also indicated the need for patient, major long-term funding for British industry.
The industrial revolution was born from the commitment of local and “country” banks to these SMEs which grew into major industries (which did not exist before the industrial revolution). In Scotland, Northern England, the Midlands and in South Wales the personal profits of businessmen made through trading were sometimes directly invested in local businesses, but as the industrial revolution progressed local banks redirected people with money towards people with ideas and local banks invested in local industry . The SME of the Carron Iron Works in Falkirk was the forerunner of Ravenscraig (and the second author of this article visited both sites while they were still ablaze with life). In Birmingham, Matthew Boulton used his personal funds to build many of the steam engines which Watt had improved through the patented separate condenser, providing the engines of the industrial revolution on land and at sea in the ships of the merchant marine and the Royal Navy. The fortunes of the Glasgow Tobacco Lords created the Clydesdale shipyards, and personal monies placed in local and “country” banks created the cotton mills of Manchester, the mining and metal industries of South Wales and the millions of other “cottage industry” SMEs throughout the UK which have continually reformed their activities down to the present day.
All successful economic developments in all countries – in the UK’s industrial revolution, in the USA, in Germany and in Japan – have depended not just on the major industries in a country but on the millions of SMEs which continually provide the wellsprings of small scale services and manufacture without which major national industries could not flourish.
It is essential that the hundreds of local CICs with thousands of branches are established throughout the United Kingdom. These local CICs should have a “local first” commitment to the success of local SMEs which should be provided with the funds required to provide the liquidity, working capital and plant and equipment investment to improve their commercial operations.
Professor Richard Werner and his associates are trying to establish just such a Local First Community Interest Bank in Hampshire and such a development would be very helpful but hundreds of these banks need to be created. These local banks could be quickly provided by the nationalisation of the Trustee Savings Bank and its local branches, which could be regrouped into quasi-independent local first CICs committed to the success of the SMEs and industries in their local area.
© Bryan Gould and George Tait Edwards 2015Tags: Domestic (UK)
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This post was written by Bryan Gould and George Tait Edwards