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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:
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.
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will not help those most in need, do not support CDFIs that have continued to provide finance where banks have long withdrawn, and pretend that business as usual can be restored.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.
Andy Wimbush is nef‘s Communications Assistant and blogmaster. He also draws cartoons for nef‘s newspaper.
It’s been over a week now since we launched our proposal for a People’s Bank based at the Post Office. In a packed committee room in the Houses of Parliament we heard politicians of all stripes voice their support for this new kind of bank, one that would put communities, small businessses and the financial excluded first.
The only speaker to mince his words and to temper his enthusiasm with caveats was, of course, the Minister for Postal Affairs, Pat McFadden. There is a danger, McFadden warned us, of becoming so ‘nostalgic’ about the Post Office that it blinds us to its current problems and the need to modernise. And then he said: ‘We can’t simply go back to the way things were’.
We can’t simply go back to the way things were.
But isn’t it McFadden and the rest of this Government – rather than the Post Bank Coalition – who are the real nostalgics here? After all, they’re the ones who are desperate for us to go back to the way things were before Lehman Brothers declared its insolvency, before the failure of HBOS and RBS. They continue to pump seemingly endless amounts of public money into banks which, as nef argued in our banking report I.O.U.K., are no longer able to perform the most basic functions of a bank.
The Post Office, by contrast, remains a vital and much-needed element of the UK economy. nef‘s research shows that each post office saves neighbouring small businesses around £270,000 each year. And small businesses employ the majority of the private sector workforce, around about 58%. Nor is the Post Bank simply a means of saving the Post Office network: we also believe it would offer something markedly different to what the current high street banks are doing, even taking into account the fact that these banks are now effectively in public ownership. As Liberal Democrat Treasury Spokesperson Vince Cable said of the Post Bank proposal:
This is an attempt to clean up banking. The co-option of the system has spread right through into the branches. There was aggressive cross-selling, commission-based branch managers were drawing people into transactions they should never have done. This is a cleaner principle based on sound banking ideas, but driven by public interest rather than narrow short-term profits.
What’s more, the proposal could easily be put into action. A recent poll by PoliticsHome.com revealed that 74% of the electorate think that a Post Bank would be a good idea, even at this early stage. And brand experts have agreed that the Post Office is uniquely situated – both geographically and within the public consciousness – to be able to provide trusted, reliable financial services amid so much economic turmoil.
The only thing stopping McFadden, Brown, Mandelson and their ilk is their neoliberal nostalgia. They are desperate to get back to business-as-usual without apology because it is too uncomfortable to admit that the Thatcherite economics with which they dramatically transformed their party has failed. While they wish that we could all just go back to the way things were, others are forging ahead with a new 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.
The 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.