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


The topic of the day is unemployment. At the moment, more people in the UK are unemployed than they were before Labour came into power. Not a nice reflection on the track record of the current Government. Why were so many jobs lost? Of course, the financial crisis. Always the financial crisis. However, looking at the types of jobs that are lost, many of those would have been low-skill jobs in the service sector that are expendable when the going gets tough. Demand for dry cleaners, office cleaners, caterers and sandwich sellers disappears quickly when the people demanding these services (i.e. those working in financial institutions) find themselves out of a job as well. So, all we have to do is make sure these financial wizards get their jobs back, so that those caterers and cleaners can get back on track, right? Wrong. What the crisis very clearly shows is that a lot of the employment created through the bubble was fleeting, just as the billions or even trillions of pounds that have now vanished into thin air. The jobs were not embedded in the real economy, the manufacturing of goods or the provision of services that we all need every day – for example good quality child care. Instead, people worked hard for measly incomes, were mostly unable to save, and loose the few assets they have, e.g. cars (which are often needed in order to get a new job). At the same time, they can’t honour credit commitments any more, meaning they are frequently over-indebted – or have already applied for personal insolvency. The latest stats show another increase in this

So what we need to do as part of the recovery is create jobs that allow people to build greater resilience against such crises in the future. There is little point in having millions of people relying on the hire and fire jobs that are so dependent on the economic cycle. In addition, people need help in building savings, skills and aspiration – now more than ever. However, as we discovered in recent research, many efforts to build assets and thus to improve crisis resilience are eroded during the current crisis. Governments across the EU are cutting back social support to the unemployed, and cancel grants to organisations that seek to help people in dire straits. Instead of nurturing the efforts of aspiring entrepreneurs and savers, there is little to no effort to help people help themselves. Particularly in the UK, asset erosion is happening on a large scale. Banks repossess houses at the earliest possibility instead of trying to find a solution with the client. Even worse, debt is sold off to debt collection agencies that sometimes use threats and psychological warfare to recover money, with an added fee on top. Credit card companies often refuse negotiations with debt advice organisations and insist on immediate payments. None of these practices are challenged by Government. Everything plays second fiddle to the financial institutions – it’s for them to get their books back in order, and the quickest way of doing this is to get rid of bad debt. In the long run, this practice entrenches existing and new poverty.

Our research found that organisations such as Toynbee Hall and Fair Finance see a huge increase in demand for their services. Scarily enough, many of the people now seeking advice and help are those that were considered well-placed in society: low- and middle-income families with a house and a steady income. Despite this increase in demand, not a penny of the stimulus packages has been allocated to these and other organisations to meet the increased demand. The consequences: bankruptcy and hardship. Poverty and destitution. This will cost a lot more in the future to rectify than investing in advice and support services now. The overwhelming majority of people wants to work and is seeking work – but they have to have the ability to do so. An undischarged bankruptcy, homelessness and a pile of debt and worries will not be helpful to this end.

Our report thus calls on the Government to support asset building efforts and to recognise how helpful they can be in helping people through tough times. Asset building should be part of mainstream politics, not a niche as they are now.

It is always better to make people self-reliant rather than having to feed them in times when money is tight. Cutting budgets for asset-building activities now is the worst way of going about it.

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

A light at the end of a tunnel - or is it an oncoming train?

A light at the end of a tunnel - or is it an oncoming train?

Barclays is said to be already recovering from the credit crunch whilst most of its clients, and the population at large, still are not even seeing a sliver of the light that could indicate the end of the tunnel is in sight. Small businesses still face cuts in their existing overdraft and credit facilities despite of the fact that their businesses are structurally sound. People with consumer debt still face increased interest rates. Personal insolvencies, as a result of redundancies, are at an all time high (link to insolvency services). Mortgage holders see their interest rates rising. Banks reposess houses more quickly than ever, and debt collectors are also becoming more aggressive.

So what does this increase in banking profits actually mean? Are we seeing a rehabilitation of our broken financial system? Or are we simply on the way to returning to business as usual, with the toxic loans written off?

The simple answer is – no-one knows for sure. There was certainly a gradual return of confidence, meaning that people will want to invest again. But there remains also a certain amount of question marks. As Robert Peston from the BBC argues, banks are reducing the amount of money they lend, so that they simply have more on their books.

In addition, however, the way that banks post their profits can change quickly as they can use different methods of valuing their assets. Asset valuation is not an exact science, and there are various ways of doing so.

Be that as it may, everyone is sighing a breath of relief that at least two banks don’t appear to go the way of Northern Rock (although there are interesting ideas around to breathe new life into it. That relief could be (and in certain quarters, is) giving way to complacency and a return to BAUBAB: Business As Usual and Bonuses Are Back. Despite Barclay’s assurances that bonus payments are reformed, an average of bonus £100,000 for staff at Barclay’s Capital still makes me think that this is more cosmetic.

We probably will have to repeat this until we’re blue in the face – but banking reform has not gone anywhere near enough to create a stable financial system in which systemic crises such as the current one are less likely to happen. And anyone who thinks that the crisis is over forgets that for the millions of unemployed, and those steeped into debt, it’s only the beginning.

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

The Treasury Committee has published its last report on the banking crisis today, and it isn’t exactly diplomatic in its choice of words to describe the FSA’s failing and what needs to be done to prevent such a crisis from happening again.

The report says that the FSA failed ‘dreadfully’ in its banking supervision in the run-up to the crisis, and although there are apparent changes in the way it’s dealing with the market, the committee fears that these changes may just be a fad.

With that, they hit the nail on the head: it is to a certain extent quite fashionable now to talk about tighter regulation and letting banks not to grow too big. However, this rhetoric is rarely followed through with sufficient vigour. The Government, which is also heavily criticised in the report, should take the recommendations of the select committee to heart and act on them. They tie in nicely with our recommendations, so it’s well worth repeating them here:

– Separate retail and investment banking
– Ensure that no bank is too big to fail, or even too big to save
– Increase capital holding requirements for banks
– Don’t shy away from speaking out

The last point really must be emphasised. For too long, anyone who voiced criticism of the Finance-binge bonanza, be it a regulator, a banker, or a politician, was branded a spoil-sport and a doomsayer. I don’t want to excuse the FSA for its inactions and ineptitude, but even if it had taken a tougher stance, then it is quite likely that banking lobbyists and the Government would have told the regulators to back off. Hence the committee’s remark that the FSA must ‘develop the confidence to take unpopular decisions’ falls a bit short of the mark. The FSA must be given the authority and independence to be able to develop this confidence, to be able to be unpopular. Regulators aren’t there to make the banks all comfy. They are there to ensure the our money is safe. Let’s make sure that that’s not forgotten.

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

Remember to think happy thoughts!

Remember to think happy thoughts!

As promised yesterday a short summary of thoughts on the Government White Paper: Reforming the financial markets.

Unsurprisingly, but sadly, the bigger picture has been missed. There are many reforms that tweak the system here an there, but few that will change the overall picture. The paper isn’t really committing the Government to do too much whilst trying to give the impression that decisive action is being taken.

Most disappointingly, Darling will not move to break up the bigger banks, following the concept of: if it’s too big to fail, it’s too bit. Zero points for this.

The second biggest problem is the lack of immediate reforms. Many of the proposed measures will not be implemented immediately, giving the opposition (i.e. most of the financial industry) plenty of time to mount a counter-offensive. The City has one aim to restore business as usual and that bonuses are back (or BAUBAB as I like to shorten it). One journalist likened the current atmosphere in the City to the end of Terminator 2 – just when you think that that horrible robot has been smashed to smithereens, it is reassembling. It is thus crucial to work fast and seize the opportunity to reform the financial system in a meaningful way. Unfortunately, party politics and bickering defuse the potential of decisive and effective action that would reduce the influence of finance on UK politics and economy. It appears that no-one at the top of either banking or politics has understood that finance should be subservient to the needs of the economy, not the other way round.

Also zero points on the issue of bankers’ bonuses: Darling talks the talk, but certainly does not walk the walk. The short section on pay suggests to draw up a code of conduct buy February and banks will have to report on their compliance with this code yearly. However, there is no indication yet what will happen to the banks if they fail to adhere to the code. Basically, we’ll be none the wiser until then.

The paper scores slightly better on the issue of pre-funding. Basically, pre-funding would mean that banks have to pay a part of their money into a pot as insurance against their potential collapse. This pot of money would then be used to repay depositors. There are some obvious advantages to this: instead of the Government having to cough up vast amounts of money at a moment’s notice, there is already some earmarked for it. A bank collapse will still be unpleasant, but it will be slightly less painful. Also, from a behavioural point of view, a levy on banks would remind them regularly of the potential of failure. Banks are, unsurprisingly, against this levy, as it reduces the amount of money they can use to invest. In addition, they say it’s expensive and puts an additional burden on them when they are trying to get back on their feet (needless to say they fail to point out that they stumbled over their own feet in the first place). But there are other factors at play: banks, as we all have learnt over the past year, rely very strongly on trust. So banks have to be trust-worthy institutions in order to attract clients and make investments. That’s why individual banks cannot say that they will insure themselves against failure – that would be paramount to suggesting that they are not sure that their bank’s strategy is foolproof. Bankers might say that banks in general collapse once in a while, but they would not be able to concede this possibility for their own bank – investors would be scared away (I personally would trust a bank that was a bit more realistic and didn’t pretend it would know everything, and hence took out insurance against failure. But then, that’s just me….)

To get over this dilemma is simple – make it compulsory for every bank to have insurance. Of course, this may still tar the reputation of the whole of the banking sector a bit, as it indicates that banking collapses are not as rare as some would have you believe. That again could be a good thing: prudence is also required on the side of the consumer. So, if Darling really introduces this levy, that would be a step in the right direction.

There are also some great ideas on counter-cyclical measures: make sure that banks build capital in the good times to use them in the bad times. That kind of thinking is definitively the clever one, and if the regulations are strong enough to prevent banks from getting around them, then they will do more for financial stability than many other suggested measures. The question-marks are around the how and when – and especially the ‘when’ is urgent because of aforementioned efforts to reinstate the previous state of affairs.

If you want a digested read digested: we don’t know what will happen until it may be too late.

On that cheery note, I recommend you read some something relaxing now – such as our suggestions on five ways to well-being. Money, after all, isn’t everything.

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

Alistair Darling will today present the Treasury’s ideas on the future of British banking. In a couple of hours, the media will descend to some venue or other to hear what Darling and his team have come up with to get us out of the current mess we’re in.

I don’t quite understand why they insist on an official publication launch when most journalists already appear to know what’s in it. So, why don’t we do a brief overview of the Cassandras and soothsayers’ musings pre-publication…

The Financial Times talks about a tough new system: the new rules would result in banks splitting up to subvert new regulations for risky business, or move abroad to escape this new, ‘tough’ regime completely. The former would not be a too bad idea, seeing as the large size of banks contributed to the problem in the first place. The FT, however, also states the sad sad fact that Darling will not break up the big banks, although there is a clear mandate to do so: if a bank is too big to fail, it is too big

Over at the Guardian, the really rather silly bits of the reforms stand out: the hacks there appear to know that mortgages and pensions have to hold health warnings – similar to those on tobacco and fatty foods. What would that look like?


Hey, that’s going to restore trust in the banking system!

The Telegraph already has a comment out before the paper is there – on how politics is going to foul the reforms. Very true, seeing that it appears all about who wins the next election rather than trying to do something about the mess now, and that the battle lines are drawn up. Not that papers in any way shape or form contribute to party politics.

The BBC quotes the head of the British Banker’s Association, Ms Angela Knight, to be very cautious. Now that seems rather cheeky of someone who represents banks whose primary modus operandi was to throw caution to the wind – and expect the tax payer to pick up the bill. The BBA should really be a bit more careful of what they’re saying, given that their mandate is a bit shaky – what with two of the big four banks being propped up by Government, one of which, along with Northern Rock, is owned by the public. As far as I know, the BBA doesn’t have a representative of the new bank owners (i.e. us) on board. This seems to kind of diminish their legitimacy!

The Independent focuses on the benefits for customers: a NHS-Direct style hotline for people unsure about what financial product to buy. The scandal of overdraft charges needs to be resolved, and they too mention the health warnings on riskier products.

All of these little snippets also mention in one form or the other the fact that banks won’t be forced to split up in to smaller units. Reading through these articles, there is a palatable sense of wonderment – either with a (secret) sigh of relief from the FT, or with puzzlement as to why the reforms appear to be so superficial.

It does seem rather odd that the big issues are left out: why retail banking and investment banking are not split up again; why banks are not cut down to size; why bonuses are not capped – although the Times seems to think that they are..; why, in other words, there is no proper reform of the financial system that has collapsed.

The city is already trying to return to business as usual, and unless Darling keeps a few bomb-shells up his sleeve, then the paper will do little to stop this.

Well, I shall try and speed-read through the paper later and see if the reforms will actually be a proper remedy rather than just a band-aid.

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.

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

The ClubCard creates a huge database about customer spending habits. Tesco's new current account will add to the supermarket's knowledge about the way we shop.

The ClubCard creates a huge database about customer spending habits. Tesco's new current account will only add to the supermarket's knowledge about the way we shop.

Yesterday, Tesco has announced plans to provide current accounts in thirty of its stores. If this pilot scheme is successful, then the supermarket giant will roll-out banking services nationwide.

In principle, this isn’t a bad move. Britain’s banking sector isn’t really a competitive one anymore. According to an Office of Fair Trading report written before the Lloyds TSB-HBOS merger, 79 per cent of current accounts held by four high street banks. Any injection of competition into the market is, therefore, a welcome thing. And with 2,115 stores across the country, Tesco outstrips the network reach of any single bank.

But those 2,115 are also turning our high streets into Clone Towns, robbing the UK of its retail diversity. And although Tesco has successfully monopolised the nation’s grocery shopping, it shows no signs of slowing down. Tesco is quickly becoming a cradle-to-grave company. You can buy your baby food, school uniform, kitchen appliances, computers, books, internet access and telephone (both mobile and landline), fill up your car and get it insured, get a health check and prescription and, yes, even plan your funeral at Tesco. In many communities, the only pharmacy is in Tesco. It’s becoming the one-stop-shop for your entire life.

In this light, Tesco’s banking plans hardly look like a diversification of the market or the creation of some healthy competition.

Tesco also has one of the biggest databases storing customer information. If you use your Tesco ClubCard regularly, then you can be sure that the supermarket has a wonderfully clear map of your spending habits: what you buy, where you buy it, when, and how often.

Now that they’re throw banking services into the mix, they’ll have another database at their fingertips. My bank can quite easily tell what I do from my transactions: whenever I pay with a card, they know what I bought. That’s why I quite often use cash. I don’t have loyalty cards: they save you very little money, but they do make you a perfectly observable consumer.

Now, I’m not suggesting that Tesco will breach customer confidentiality or abuse the data that they collect. Due to banking rules, they will be unlikely to be able to match a bank account with the data collected on a Tesco ClubCard.

Nevertheless, the information that Tesco will hold about a person with a ClubCard and a current account would reach frightening proportions. This concentration of information is worrying. If you think that the Government holds way too much data about your person, then think again. Tesco is likely to know more about you than your local council or your GP. And if you are lured by their offer of a current account, they will soon know even more.

Whilst Tesco’s move into banking is, on the face of things, a welcome addition of diversity to the retail banking market, it also is the opposite: concentration. Concentration of the provision of goods and services in one company, and concentration of data collection.

Let’s make sure that Tesco isn’t the only new bank on the block. Support our campaign to offer banking services at the Post Office. Write to your MP and tell them to support Early Day Motion 1082. Chose to bank at a place that you trust and that will also support your local community: the Post Bank.

UPDATE: You can now sign a petition supporting the Post Bank.

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

The credit crunch has made subprime lending part of our vocabulary. We, in this instance, are those with secure jobs and good credit ratings, who prior to the crisis had little or no problems accessing credit from banks at low cost. And if our credit cards were finally maxed out, there were always sub-prime lenders happy to help out.
Cattles Plc is one of them, or better known under the name of Welcome Finance. It provides minimum loans of £750, targeting a lower-middle income group that often has access to credit, but wants a little more to finance that extra holiday or similar. By the way – these are gross generalisations. Companies such as Cattles are often the lender of the last resort when catastrophes happen, e.g. that flood damage your insurance won’t cover or that crashed car that needs urgent repairing.

Anyway, Cattles is in deep trouble now, with many of its clients not repaying their loans because of the economic crisis, and, as a consequence its share price plunging. In addition, Cattles relied on whole-sale finance to cover its capital requirements. This means that it borrowed money from mainstream banks such as HSBC, RBS or Barclays, and then used that to give it to its clients, making a tidy profit in the process: say, it lent at 6% from a bank, and then charged interest rates of ca 150-300% to its clients. Do the maths yourself (oh, and the banks obviously earn the 6% – thus making money by lending to a company that serves those people banks deem to be too risky to lend to… some contradiction….but that’s another blog…). Now that the banks don’t lend, Cattles has run out of cash and can’t lend anymore either. It has already stopped accepting new clients, and it has just suspended three senior staff for apparently embellishing numbers of expected bad debt . This is reflected in the share prices, as the little picture below shows:
Cattles Provident

Note the other, upper line in the graph? That’s Provident Financial Plc, the leader in the sub-prime lending market. As you can see, they are doing just fine, thank you very much. Why? Because their clients, as well as those of many of the other sub-prime lenders, are dependent on this credit, because their incomes do not cover their basic costs of life. Clients are mostly on the very low end of the income ladder, and are unlikely to have a credit history of such quality that would incentivise banks to give them an overdraft – if they have a bank account at all. For most, taking out a loan is not a choice, but a necessity – to pay for new clothes, or get a new mattress, until that next paycheck comes in. It’s a complicated issue, but rest assured, people taking out a loan with a door-step lender (as they are also known) do not do that to pay for plasma screen TVs or similar. It is to pay for the basic necessities in life. For the privilege of providing food and clothing for their children and themselves, they pay a steep price – for example, 365% APR for a loan of £50 over 31 weeks. This means that for borrowing £50, clients pay £77.50. Seems not a lot to you and me in total terms, but if you are on a very low income of, say, £70 a week, you quickly can get squeezed.

And, the sky is the limit in regards to APRs – there are no caps in the UK, meaning that some lenders charge up to 1000% on loans. And that is legal. If you play around with the loan comparison website , you can see for yourself (again, the reason as to why the UK does not have an interest rate ceiling deserves a whole report on its own – watch this space…).

So, the Provident and other companies serving this end of the market are pretty crisis-proof. As long as incomes and benefit payments are as low as they are, people will have to continue to take out credit, unless they want to starve. There are alternative lenders, such as Community Development Finance Institutions and Credit Unions. They are cheaper, transparent, and often provide a springboard out of the debt trap through personal advice and support. But they don’t yet have sufficient scale to provide this service to all those who are dependent on credit to make ends meet. Hence, there will be no shortage of clients for door-step lenders, and it is possible, as unemployment rises, that more and more people will be forced to borrow for basic expenditure. But hang on, didn’t excessive lending get us here in the first place? Hmmmmm…What interesting time we are living in….

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

unbalanced-scalesWestern countries have long been accused of being glib about economic matters, and now we’re facing the consequences of our hubris. Our ceaseless insistence that our our economic system is stable and that everyone should aspire to copy us makes us look really stupid now in the eyes of the many other countries which did not or could not do what we did – live on credit.

Many transition economies and developing countries will suffer as a consequence of the credit crunch. In a globalised world in recession, globalised trade will suffer, and export-dependent countries will feel the pinch acutely.

So, in a way, I can’t blame the leaders of China and Russia for scolding the West. The greed and blind faith in funny money have caused most of the trouble. But there is another side of the story, namely that of the balance of trade. A balance of trade is the difference between the value of goods exported to one country, and the value of goods imported from the same country. So, if country A exports goods worth $100bn to country B, but only imports goods worth $40bn, then the balance of trade is positive for country A, as it exports more. For country B, on the other hand, the balance is negative. So, country B depends strongly on country A to provide it with the goods and services that country B cannot or does not produce. If country A stops producing these goods, then things don’t look good for country B. It will either have to go without, find another country where it can buy these goods from, possibly at a much higher price, or start producing the goods themselves – but that can’t be done overnight. Country A on the other hand is also interested in country B continuing to buy its goods. If they suddenly stop buying, then it has to find another market – but there might not be one, so its economy can also be hit by a sudden drop in exports.

So, overly skewed balances of trade are not good for either party. And this is where China’s remarks on America’s greed become interesting.

For the US, the balance of trade with China has long been negative, i.e. the US imported far more goods from there than it exported to China, as these figures on the balance of trade between the two countries show. In 2008, the US imported nearly 4 times more from China than it exported there. And we’re not talking peanuts. We’re talking goods imported from China to the tune of US$312bn, while the US only exported goods worth US$66bn. The US trade deficit: $246bn in 2008 alone. There is something ironic in the biggest capitalist economy on the globe relying so much on the last major surviving communist power player (both politically and economic) in the world.

In the olden days, this dependency was considered dangerous for the US. What if there was a revolution in China, or their economy collapsed, or their goods became more expensive? The US would suddenly be unable to rely on the cheap imports that helped sustain their economy over the last decade.

But as it turns out, it was the US economy that collapsed, leaving China exposed to massively reduced demand for its goods and services, resulting in a slow-down in production and economic growth (note that this of course also applies for all the goods and services China exports to the EU).

This is bad news for China, and their premier is right to be demanding more of a say in the world economy. On the other hand, I’m assuming that China realised that its dependency on exports may come to haunt it at some point, and that its growth was partially fuelled by the Western greed that Premier Wen Jiabao rightly blames for the mess we’re in.

But we all, including China, have to realise that we all massively benefitted from the cheap credit that allowed us to buy houses, holidays, and other stuff. Never mind it was always clear it would not last. Never mind it was always clear it was unsustainable. But most of us have profited one way or another from it. I’m all for finger-pointing and blaming myself, but only as long as we remember that our credit bubble also was responsible for much of the economic boom we saw in many countries – growth that is now leaking out of the cracked bubble like gas from a leaky balloon. I don’t think that a player the size of China can pretend not to have realised that this is a bubble and will end sooner or later. Otherwise, they were just as blind to it as our Western economic soothsayers. And that would be really scary.

P.S.: The same argument goes for Russia, by the way- but there is only so much space in a blog.

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

sausagesforsaleThe Government, or rather the Department for Business Enterprise and Regulatory Reform (BERR), has just announced the introduction of a new Government guarantee scheme, the Enterprise Finance Guarantee. Many papers imply that the taxpayer may ‘commit to guaranteeing up to £21bn of bank lending’ to small and medium enterprises or SMEs.

But don’t worry, we’ll never have to pay this vast amount. Because in essence, the scheme aims to get banks to do what they usually do, which is lending to businesses with very little likelihood of going bust, just like they did before the crunch.

Why? Bear with me while I briefly delve into the loan guarantee schemes. These schemes are principally designed to encourage lenders, e.g. banks, or CDFIs , to lend to enterprises that they normally would deem to be too risky to lend to, for example because the entrepreneur does not have a good credit history, or trades in a niche markets the bank has never heard of before.

In Britain, this scheme has existed for quite some time under the name of the the Small Firms Loan Guarantee Scheme, or SFLG. Under the scheme, the Government guarantees 75% of the loan, i.e if the business goes bust, the bank can rest assured that the write-off is only 25%.

An example may help. Let’s say I want to open a business dealing in something rather obscure, say, in German delicatessen such as Weisswurst. For this, I need a loan of £5000. There isn’t much evidence of the market size in the UK for Weisswurst, and hence the CDFI is reluctant to lend me the money as they can’t be sure I’ll succeed and pay the loan back, interest and all. But because of the SFLG, they will lend me the money anyway as the government will guarantee 75% of it, or £3750. This obviously greatly reduces the potential loss should no one decide to embrace the pleasures of Weisswurst.

BERR’s new scheme ostensibly still does the same – but in fact, it is a much reduced version of the SLFG. At first sight, it sounds like a good deal, because the minimum and maximum loan levels it can be used for have been extended. Under the old scheme, only loans between £5000 and £250,000 would be guaranteed. Under the new scheme, this is expanded to include loans of £1000 to £1m. But, and this is where it gets tricky, there is a claim limit of 13.75%.

This means that if a CDFI lends £100,000 of guaranteed loans, it can only claim a maximum of £13,500. So it loses out, big time. Under the rules of the old scheme, CDFIs could claim £75,000 of the £100,000 back. So the new scheme is a whopping 82% reduction compared to the old guarantee!

This much lower guarantee will prompt lenders to only lend to those businesses that seem to be low-risk – thereby perverting the original aim of the Guarantee Scheme to provide credit to business that is slightly less ‘normal’ than what the lender thinks it is.

Hang on – isn’t this what banks are supposed outside of these guarantee schemes? Err… yes. But they don’t. That’s why they need more incentives. In addition to the billions of pounds of public money they have just received, the interest cuts, etc. So what happens to all those businesses that fall of the way-side of banks’ tight credit scoring?

Given that the definition of what is risky or not lies with the banks, and banks currently don’t seem to be too keen on the old lending business, there may well be thousands of businesses who will suddenly find themselves on the wrong side of the credit score, without any recourse to credit, because the guaranteed loans all went to those businesses that do not present a risk. So they will go bust. That’s exactly what the scheme was supposed to prevent – but is perversely quite likely to encourage. So, our taxpayers money is safe – until it has to be spent to help those millions who have lost their job to find new ones.

Shurely shome mistake?


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.