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will not help those most in need, do not support CDFIs that have continued to provide finance where banks have long withdrawn, and pretend that business as usual can be restored.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

To mark the publication of I.O.U.K.: banking failure and how to build a fit financial sectornef‘s new report on banking – the nef triple crunch blog is staging a debate. Sargon Nissan, one of the authors of the report, kicks things off. Replies from our special guest bloggers will be posted below.

Banking unfit for purpose

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.


When Lord Mandelson said, last November, ‘It’s completely unacceptable to the Government and to business in this country for banks indefinitely to stop functioning as banks.’, he inadvertently revealed policy makers’ confusion over what to do amidst this unprecedented crisis of banks and the financial system.

They’ve recogI.O.U.K.: The failure of banks and how to build a fit financial sectornised banks have stopped functioning (who hasn’t?) but not that they’ve become unfit for purpose.

Our banks have become far removed from their roots as lenders and investors in communities and businesses, as we reveal in our new report, I.O.U.K.: banking failure and how to build a fit financial sector. Decades of banking sector consolidation have been encouraged by lax regulation. There are now fewer bank branches than post offices in this country – and the number is set to drop still further. Meanwhile, Community Development Finance Institutions (CDFIs) have been starved of support while attempting to address this failure directly.

Increasingly desperate Government bailouts – witness Monday’s £260 billion underwriting of Lloyds and Barclays now reportedly ‘mulling’ the Treasury’s offer to underwrite its toxic assets –  are having little effect bar robbing the taxpayer.

The Government is throwing good money after bad. Read the rest of this entry »

Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Before our eyes the financial crisis is accelerating into a downward spiral of nightmarish proportions. Today it was confirmed for the first time that the UK is officially in recession, as the effects begin to hit the real economy in earnest. Nobody expects things to get better before they get a lot, lot worse.

‘Decisive action’, we are told, is being taken to deal with the banks. The latest £50 billion guarantee package comes hard on the heels of the untold billions to ‘recapitalize’, or to provide ‘liquidity’, or just to keep the lights on a little longer in the hope that something turns up.

The government resembles a grimly optimistic hot air balloonist, spat out of a storm and crashing to earth while frantically pumping more and more hot air into the balloon, only to see it flow out of huge holes rent in the fabric of his craft. The pilot, lets call him Darling, will certainly delay the crash a little bit, but only at the cost of using up all of his gas. Once the basket hits the ground – in whatever battered shape – it will surely stay there.

Read the rest of this entry »

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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.