Bookmark and ShareVeronika Thiel is a researcher and project manager on nef’s Access to Finance team.

Browsing through the papers and reading about different ways that governments seek to help enterprises of all kinds recover from the economic crisis, I noticed just how paltry the UK Government’s efforts are.

What made me realise this is the difference in the size of loan guarantee schemes. I blogged about these before, but here’s a short reminder:

Loan guarantee schemes provide a state guarantee to lenders when they extend credit to businesses they would normally not lend to. This is to circumvent overly cautious lending and over-reliance on schematic credit scoring indicators. In the current circumstances, they are used to get banks lending again.

One look at the graph below show why the UK support will just not be anywhere near enough to safeguard UK enterprises:

Spot the difference

Spot the difference

It has to be stressed that the US section of the bar doesn’t provide the full extent of the Obama administration’s efforts to support US companies. The $60bn are for loan guarantees in the green sector ALONE. There are further hundreds of millions set aside to support small and micro enterprises. Plus, the US administrating is channelling an additional $243m to CDFIs, community finance organisations that successfully invest in communities traditionally neglected by banks.

In the UK, we too have CDFIs, and they do a sterling job despite the fact that UK support is much less generous. How much less generous?

Look at the chart below. It will tell you.

US: $243m in 2009. UK: Zero. Zilch.Nada.

US: $243m in 2009. UK: Zero. Zilch.Nada.

But that’s not the end of the depressing story. Not only does the UK provide the lowest amount of loan guarantees, not only does it not help the CDFIs, the recent reform of its loan guarantee scheme actually decreases security for the lender.

I refer you again to my blog in March to read up the details, but the industrial policy of the UK can be summed up as follows:

  • Provide a shoddy loan guarantee that will not help those most in need, do not support CDFIs that have continued to provide finance where banks have long withdrawn, and pretend that business as usual can be restored.

Doesn’t sound as convincing as a formula for success, right?

Let me hence suggest an alternative:

  • Extend and increase the loan guarantee to provide real incentives for lenders, massively support CDFIs as banks have failed so catastrophically and introduce a community reinvestment act that will force lenders to invest where they get their money from – in local communities.
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