As Politics Home has reported this morning, the government is very upset that banks are not providing the loans to failing businesses that they thought would be made available as a result of its £330 billion loan guarantee scheme for companies needing help.
I am afraid to say that this bemusement on their part is a simple indication of their lack of understanding of how business and banking works.
I should add that those saying that banks are seeking to profit from these schemes by asking for personal guarantees from companies seeking such funding does the same thing: it also reveals a fundamental lack of understanding on the part of those making the criticism.
Let me explain, subject to one caveat, which is that no one should believe I am a lover of banks when offering the following comments. I am not. I am severely critical of them, and have made that clear, very often. But what I am saying is that you cannot criticise them for doing what is necessary to ensure their own survival at this point in time.
First, as I have noted endlessly on this blog since this scheme was announced, it is a hopelessly inappropriate measure at this moment. Failing companies, or those that fear they might become failing companies, cannot borrow. It is illegal for their directors to do so as this compromises all their creditors. And since bank loans are creditors they cannot borrow in that case. By definition, this scheme fails to help most it is intended to support. Of course the number of loans to be offered will, in that case, be vastly smaller than the governments expects: the law requires that almost all companies who want these loans cannot have them.
Second, the scheme only covers 80% of a loan: the bank is on the line for 20%. They could lose that money. If they lost 20% of £330 bn that would be £66 bn. Why should they do that for the government? Why should they do so when that will put their own businesses at risk? And why should they be forced to the point of needing a bailout by a government-imposed scheme? Quite rationally they are saying they cannot lend in that case.
Or, quite rationally they are instead seeking personal guarantees and the houses of owners as security in that case because this is what banks in the UK always do when lending. There is nothing new about this. It's not a good model. But it is our model. And nothing about this crisis is going to change that. So no one should have been surprised that it is happening but that it also, and again, reduces the attractiveness of this scheme.
Rishi Sunak and the government seem surprised that their largesse is being thrown back at them, but there is good reason why it is being rejected: it does not, cannot and will not work for businesses in trouble at this moment. It was flawed from the outset.
Sunak is announcing measures for the self-employed today. He should also be announcing 100% backing for loans. Unless he does that the £330bn is just a figure in a press release of no consequence for the U.K. economy and the survival of companies within it. The way forward is for him to decide upon, but so far his decision making on this issue simply shows that he does not understand how business and UK banking works.
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I notice that BBC news are just waking up to the fact as well. Not sure what their business journalists have been doing over the last few days.
They should have been here
Karl surely you mean “what have they been doing over the past few years”. Not a lot that I can see.
have you heard of any measures to expedite the process of making an online Universal Credit claim?
I’m hearing anecdotal evidence of a large surge in claims and people finding themselves waiting at the end of an enormous ‘virtual’ queue.
500,000 claims
Queues of 100,000
And there will be no change in the short term
The system was not designed for this
Oh, I don’t know about that. The Universal Credit system was always designed to be frustrating, and to delay the payment of any benefit for as long as possible. In that regard, it’s working precisely as always intended.
In these circumstances, for once, the banks are behaving entirely properly. On a commercial basis, you’d have to be mad to loan any business money if it is…
1. Unable to trade
2. Unable to say when it will be able to trade again
3. Unable to project what the volume of trade will look like upon resumption of trading
The state can take such leaps of faith, but moral hazard abounds.
Yes but most voters still believe the Thatcherite mantra that government has no money of its own completely oblivious to the fact those who can are piling out of bonds including government gilts for cash or gold not to mention as you say private sector banks substantially reducing their loan portfolios for the reasons you’ve given. The future isn’t looking bright for the UK because post-pandemic and lousy Brexit deals because the UK lacks market clout the Market Fundamentalists will be back to imposing austerity cuts on a country substantially weaker than it already was pre-pandemic.