Steroids, Nick? Euthanasia might be better

The UK’s Funding for Lending Scheme was poorly conceived, but tinkering with it now is not going to make the blindest bit of difference. The problem with SME credit is not the cost — it is getting access to it in the first place. As the FLS stands it is nothing more than a funding subsidy for banks, and they are not going to shoulder undue risk to kick-start the economy.

  • 12 Mar 2013
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Politicians love small businesses and homeowners. They hate banks. Understand that and the recent calls from Nick Clegg and Vince Cable for the government’s flagship stimulus wheeze, the Funding for Lending Scheme, to be “put on steroids” make a lot more sense.

Unfortunately, that’s about as far as it goes. The idea of tinkering with the FLS now to boost lending is laughable, and is unlikely to happen in time for next week’s budget.

The only thing empty comments like this do is ingratiate politicians to a demographic they care deeply about, or make that demographic think politicians are idiots — depending on which side of the gullibility fence you stand.

The FLS was a crude and short-sighted scheme from the start. It hasn’t worked — recent figures from the Bank of England show that lending to the real economy decreased in the fourth quarter, despite banks doubling the amount of government-subsidised funding they took through the programme.

Figures from a survey conducted by the Federation of Small Businesses show that four in 10 companies are granted loans. And out of that 40%, some 40% were offered a rate of less than 4%. Credit has become cheaper, but lending is down.

The fundamental problem is that all the scheme does is enable banks to pass on the savings they make to businesses they are already lending to. How anyone thought that was going to help stimulate new lending is a mystery.

Before the crisis, regional bank managers were typically allowed to make decisions on SME credit using their own discretion. But now the attitude towards risk has shifted substantially towards a more robust “computer says no” model. It doesn’t matter how long you’ve known your local lender — if the numbers don’t add up, you’re not getting a loan.


Removed from the market

Banks are sitting on cheap cash that they can’t lend to the real economy. At the same time, there are fewer places for outside investors like pension funds to put their money because the FLS has pushed UK banks out of the public capital markets.

Vince Cable has a British Business Bank in the works, which plans to lend up to £10bn to companies, using £1bn of taxpayer money and contributions from private investors.

But what is the point of the government doing the job of a bank when (a) doing so might fall foul of EU state aid rules and (b) it already owns 85% of one UK bank and a 39% stake in the other?

If the government and the Bank of England want to disrupt the normal flow of money through the system, they should go one step further than a half-hearted funding subsidy and either force Royal Bank of Scotland and Lloyds — which they control — to relax their lending criteria and get credit flowing to those companies they think are being neglected or take on some risk themselves.

Putting the FLS “on steroids” — whatever that means — is going to do nothing to help small businesses and everything to help banks load up on even more cheap cash they can’t put to good use. Few people win out of that arrangement. Let the FLS die the death it deserves.


  • 12 Mar 2013

All International Bonds

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5 HSBC 120,106.34 625 5.11%

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5 UniCredit 12,630.44 68 4.70%

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4 UBS 4,138.47 20 6.62%
5 Citi 4,111.21 29 6.57%