These are two FT headlines from one FT email this morning:
There has been nothing, and no one, let alone any regulation, that has prevented UK banks from lending to small businesses over the last 30 years. Any pretence to the contrary is just that: it is a pretence. As I have already noted this morning, the FT is heavily into promoting neoliberal pretence today.
The truth is that the City, and its banks, have not lent to small businesses because they have been too lazy to do so. Lending to small businesses is hard work. It requires understanding. It requires relationships. It requires monitoring. It requires partnership. But, more than all of that, it requires a belief that creating value is more important than extracting value.
Let us be honest. Both the ability and willingness amongst banks to lend to small businesses do not exist because they do not meet the requirements I note to do so, and they do not believe it is important when rent extraction is, from their perspective, so much easier.
The question to ask in that case is why financial reforms that will release more City funds for lending for growth, when bank lending has not delivered that outcome for decades, while in the process increasing the risk to depositors and the government from bank failure.
The reality is that almost no banker at work in the UK now understands what a focus on smaller-business banking really means. They have not been around for long enough to know.
Banks were never easy or reliable partners for small businesses, and I have dealt with many such relationships in my career. But once, those relationships were possible.
Now there is no desire for them on the part of our banks. The consequence is the starvation of the supply of capital to business in the UK, and the inevitable outcome is the fall in productivity that Martin Wolf is claiming in the FT this morning is actually the consequence of infantile politicians, when it is really the consequence of infantile bankers, and the infantile neoliberal dogma to which he and his newspaper subscribe.
So, what can be done about this?
My answer is precisely nothing at all until the government realises that the City is not a solution to any known problem within the UK economy. The City exists to extract value from the rest of us. It has precisely no interest in creating value, and that is as true of the banks as of the senior management of all our quoted companies.
In that case, the only solution is to bypass the City. We need to cut out the middleman in the market for supplying capital.
There are trillions of pounds available for investment in the UK. More than £700 billion is saved in ISAs, much of it in cash, and there is much more in pension funds, again with significant amounts of cash being held, as I noted in an article on Substack yesterday.
The problem is not, then, that there is a shortage of funds in the UK economy. We do, in fact, have an excess, or glut, of savings that are serving no useful purpose.
What the government needs to do now is act as the intermediary for the supply of capital from savings through the creation of regional investment banks, funded by government-backed bonds, subject to a government guarantee, as deposits in banks already are, in which it should be required that new ISAs and some pension contributions should be saved.
If the government were willing to take on this role of intermediation, which banks have long abandoned, we would have the capital we need to transform our economy. By relying on the City, as Rachel Reeves and the FT think appropriate, we will just increase rent extraction, at cost to us all.
When is a grown-up politician going to make the right choice? Funding small businesses is the way to deliver local jobs, youth employment and real training in the UK. It answers all our needs in a way that big usimness can never do. But without capital, it cannot do that. When will the government realise that and take action, and stop pretending that the City will, which is never going to happen?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Will Hutton made the point that in most of Europe they set up regional savings banks to fund industry when we set up building societies to fund house purchase.
Asking or expecting the City to invest in small businesses – any businesses actually – is akin to asking an arsonist how to put out a fire.
🙂
I have always found the idea of making money out of money a strange concept and felt that the casino world of finance traders was somewhat obscene. The former was, of old, branded usury and the latter was always gambling.
What would happen if we banned gambling for a stake greater than £1 and made business loans interest free but dependent on a decent business plan? Such a plan might also have to demonstrate social value. I have no problem with banks charging fair rates for money transfers or otherwise handling financial management but we have accorded these tokens of value far too much importance and a reset of the purpose of money might go a long way to remedying the effects of its misuse.
You could try banning gambling. Then watch Guys and Dolls.
As for non interest bearing loans, they are called equity stakes.
In conjunction with this could be the development of local not for profit cooperative banks. Deng Xiaoping after his visit to Japan implement a decentralised banking system including local banks that spurred growth in China. Other countries which had a large network of low level banks also helped develop the SME (Small and Medium sized Enterprises) sector eg. Japan, Germany, Korea, China .. Local not for profit banks (eyes on the street) are the financiers of the German Mittelstand (SME sector).
Richard Werner has attempted similar in the UK with Local First CIC (Community Interest Company) and the Hampshire Community Bank but has been stymied by BoE intransigence and the excessive regulatory burdens on small local banks, see Basel III banking regulations. USA with local on the ground bank examiners (like local tax offices) has avoided the need for excessive regulations.
You hit the nail on the head. They need official support.
A bit off topic, but this reminded me of a question I wanted to ask. How does Japan get away with a debt to GDP ration of 248.70 in 2025? A friend of a friend has gne to Japan as a tourist and is very impressed by how much simply works, and works efficiently, and how prosperous everyone seems to be. Has Japan discovered MMT?
I got involved in a scheme to start a local community bank, for both personal and SME lending. (because I was promoting a local credit union at the time). Teachers BS were trying to help us (HQ in the town).
Absolutey impossible to get past the blocks imposed by government. Strangled before birth. Eventually even the credit union (after 2 mergers), failed too.
Change is desperately needed and could do so much good (See “Bank of Dave” for an entertaining review of the issue, now Burnley Savings & Loans).
https://en.wikipedia.org/wiki/Bank_of_Dave_(film)
Much to agree with.
I worked with the credit union sector in the east midlands with the launch of universal credit. The amount of state development money from the Tories to the credit union sector got to expand into cashless payments was paltry compared to that offered to the commercial sector which charged higher fees and penalties for their services to those receiving UC (who are not the richest the people on the planet in the first place). One credit union actually folded whilst I was working on the project and another one pulled out because of the risks and costs. Austerity was so harsh, loans for washing machines and fridges (typical low value but essential items for CU business volume) started to default. It was interesting work but also a peek into a different world to housing. But what sticks in my craw is that benefit claimants were herded towards exploitative systems to receive their financial support (which often made mistakes leaving folk without money) from people who had contributed to Tory party campaign funds . Disgraceful. Never mind the Johnson Tory party; Cameron’s Tory party from 2010 was lethal to decency – the sickest manifestation of the Tory party I had ever seen made worse by the fact that they revelled in their cruelty. It has left me doing some thing I really don’t like doing which hating people (well, ‘Tories’). But I’ll give the 2010 Tories this only accolade: they earned that hate – they really did in my view at least. They caused so much harm and this why people have got fed up with Starmer – he did not do enough to remove Tory cruelty.
Thank you
Sounds good to me. From what I have read, banks were pretty unreliable during the industrial revolution, which probably favoured those with the deepest pockets. I have noticed in Scandinavia, banks called Handels Bank, or commercial bank, but I think they are not so specialised. In UK, I think Govt intervention is called for. Banks here had to be forced to provide basic current accounts without fees, and are clearly not very interested in individuals of average income or small businesses.
Those two headlines positioned close together – on the same day! – speaks volumes about the hole the UK has dug itself into.
I created the immediate juxtaposition but they were in the same mail
Me with new small business idea:
But family won’t touch it
Friends think it will lose them money
That website for crowdfunding a start up won’t seed me
The bank algo sniggered at the business plan
But You
Will get government to stake on my start again.
Thank you. The government is best to appraise risk with a public benefit leaning. Always was.
Did I ever say that? No of course not. You trolls do talk total shit.
Before the Labour Party came into power they had a grand plan backed by £28 billion a year to make the UK carbon neutral by 2050. Among other things, the plan involved huge investment in home insulation to reduce household electricity bills, which would have involved large numbers of small to medium sized enterprises all around the UK for delivery. This could have been transformational to the UK economy, both in terms of direct job creation and putting more money in people’s pockets due to reduced electricity bills. It was binned almost immediately Labour came to power, to be replaced by a greatly watered down programme with the concentration on wind and nuclear power plus electricity infrastructure upgrades, all involving large, often foreign owned companies. A massive lost opportunity in my view.
Much to agree with
My Dad was a Deputy Branch Manager for a major high street branch. He built relationships with local businesses, knew what they did, how well they were managed, and could decide if they were good for loans.
He took early retirement partly because he saw how this discretionary aspect of his role was being taken away, and eventually computerised into a canned yes/no based on some artificial rules rather than personal knowledge.
It is reflective, IMO, of the wider change in society – a move from personal interactions to highly scripted impersonal strangers. How many of us now know who our bank manager is and can meet them? We are increasingly directed to use the phone or webchat to contact support, and then fed through AI bots before we can even hope to speak to a real person.
I was quite disturbed recently ringing the NS&I line, getting a bot sounding “uncanny valley like” asking me to say what I was calling about. I mentioned bereavement and the bot then said “I’m sorry for your loss” – it’s a bloody computer program. How sick is the programmer (and the manager who signed off on it) who decided that was an appropriate response for a bot to make?
It’s not just NS&I. Nationwide are using AI that pretends to be a human to deal with customer queries. It’s deception. It should be unlawful. See Richard’s posts yesterday on AI.
Could all the people who get made redundant by AI get jobs in government funded call centres created under an MMT style Job Guarantee? Solves two problems in one.
To do what? Surely there are much better things to do.
Might it be worth considering differentiated taxation of business profits whereby finance only transactions paid more in tax than transactions which initiate and/or develop real resources and prosocial benefits?
I think this is essential
Above Richard Kirby has written ‘I mentioned bereavement and the bot then said “I’m sorry for your loss” – it’s a bloody computer program. How sick is the programmer (and the manager who signed off on it) who decided that was an appropriate response for a bot to make.’
A good point, Richard. Recordings of ‘Thank you for shopping at _____,’ just sound manipulative.
I asked a senior MP recently why Government would not fund investment in small businesses. “Because we don’t know how to do it” was the reply. However, this was in the context of discussing the work of a regionally based ‘mentor’ of emerging entrepreneurs. Perhaps there is a way to encourage networks of successful, small business creators – co-operatives, if you will. After all, the many co-ops of farmers and vineyards across Europe – and the World – must have something to teach us about supporting creative investment at small, local scale.
“I asked a senior MP recently why Government would not fund investment in small businesses. “Because we don’t know how to do it”
Time they damn well learned!
I was chatting with a local cafe owner recently who said he approached several banks for a business loan to set up the cafe and none were interested. In the end he remorgaged his home to release capital to get started. His cafe is now the hub of the community with his eldest customer being 95 who is able as a result to engage with the mums and children who also frequent the business who he would not normally come into contact with.
There was a recent docudrama on the ‘Bank of Dave’ which was set up in Burnley because other banks were not lending to local businesses and local startups.
This is such a big issue
I have always thought this 2018 paper from UCL is helpful on the question of credit guidance.
credit_where_its_due.pdf
Thanks for the reference to the UCL credit guidance paper. I wonder what house prices would be now if the policy of only permitting Building Societies and Credit Banks fund domestic house purchase had not been ‘Thatchered’.
Could the tens of billions languishing in ‘orphan’ accounts in pension companies in this country not being used to help fledgling businesses?
It strikes me as dishonestly obtained capital for these monstrously wealthy pension companies. Some people due weeks into their pension and their money just makes endless profit for the pension companies.
Inky is the right mechanism is used. I have suggested one.
Would it make sense if banks were required to diversity their loan book so that at least one half of loan assets were to SMEs rather than property? No obligation to comply (they are independent private banks after all), but no government deposit guarantee if they don’t!
I am not sure about the ratio, but the use of the payment deposit guarantee as a factor in negotiation is a good one.
Apparently before deregulation of the banks, the central banks made “window guidance” to the private banks on how much lending they should do for “productive GDP ” ie. not money making money whizzes. There was also separation of merchant banking from retail banking ie you could risk your own money for lending but not create loans from “nothing” for merchant banks I think??
Rolling back some of the deregulation’s would produce a more stable financial system.
Agreed
Small businesses are mainly able to borrow from banks when their directors are willing and able to offer personal security (e.g. their house) as collateral against the loan. This is equally true of other ongoing commitments like commercial property rental.
There are loans backed by the government (via the British Business Bank), to reduce that need for guarantees, but they can be tricky to access. Further, they don’t fully eliminate some kind of personal risk, because if a company fails the BBB will not let the company just be struck off, so if funds are exhausted trying to run the business the company owners then need to put in more personal funds to pay for a liquidation process even knowing the company is no longer viable, often when also dealing with personal guarantees for things like commercial rent or leases. The limited liability protection of a limited company ends up being solid for investors but leaky for directors, particularly for startups.
The pausing of Smart Grants further affected support available to small businesses, and Labour’s planning specifically wants to focus Innovate UK on larger projects with international scope, pulling all of that support towards large enterprises.
This leaves most innovative business startup to those with personal access to wealth or borrowing, or early equity usage giving substantial portions of the rewards to investors rather than innovators. This only helps increase wealthy inequality as the proceeds of innovation and growth accrue to wealth while the risks are not distributed the same.
Thank you
Isn’t the British Business Bank being set up to lend to SMEs?
Although I believe it is to be an intermediary rather than lend directly.
Whatever happens I assume it won’t work solve any problems because our governments seem incapable of doing anything that isn’t neoliberal.
It is a gesture
You only need to look at the Growth Guarantee Scheme. It reduces risk to banks by guaranteeing 70% of the amount borrowed, but the borrower remains liable for 100%. That will only protect the bank by limiting losses where recovery from the borrower has failed. Such schemes indicate that a personal guarantee ‘may be required’ – you can bet that for startups with limited financial records that personal guarantee WILL be required.
At that point, the scheme does nothing to reduce the risk to founders. It reduces the risk to lenders (who still expect to get an above-average interest rate on that ‘risky’ lending). As such, it protects banks and wealth rather than innovators. The innovator may indirectly be able to secure a somewhat better interest rate, but that’s more of a side-effect than the focus.
Note that it was a little different with the Bounceback loans post-Covid, where personal guarantees were not required, so they have sometimes done more, but only under extreme circumstances.
Thank you