Why doesn’t the UK have a development bank like Germany’s KfW? It’s a question many in the capital markets must often have asked — and it’s a good one. Now George Osborne, chancellor of the exchequer, has begun to offer an answer.
On Sunday he announced plans for a state small business bank to help stimulate the UK’s flatlining economy, saying “the weakness in our banking system is one of the biggest problems we’ve got”.
Public reaction has been diverse. Business groups welcomed the idea; some commentators scorned it as not dramatic enough to kickstart growth; the opposition Labour Party pointed out they called for such a bank a year ago.
As usual with eye-catching government initiatives, few details are available. We are told the bank will not have high street branches or compete with the big lenders; it will mainly operate online, and perhaps partner with commercial banks. It is also designed to act as a central, one-stop shop for the wide range of government support to business that is already available or has been announced recently.
Cheap and nasty
There are distinct signs that Osborne wants to do this on the cheap. That is a well-trodden British path and would be no surprise.
It would also be a mistake. If ‘UK KfW’ is nothing more than a glorified website it is not going to change the course of the British economy.
That is not to deride the possible benefits of centralising access to the wide variety of help and advice the government already provides for small business — especially if the quality of advice can also be improved. These, in fact, were key recommendations of the government commissioned Breedon Report, Boosting Finance Options for Business, in March.
But by calling his new venture a bank, Osborne is deliberately raising expectations that it will intervene financially. It might subsidise commercial banks’ lending to small businesses — one of KfW’s main activities — or guarantee large chunks of such loans, as the US Small Business Administration does.
Hands tied
The trouble is, Osborne is caught between a lot of rocks and hard places. British politicians are terrified of being branded socialist. That is one reason why the last Labour government pledged not to use its controlling stakes in Northern Rock, Royal Bank of Scotland, Lloyds and Bradford & Bingley to influence lending to the economy — something that to most of the world’s governments would have seemed a no-brainer.
The Conservative administration has stuck with this policy. You can berate the banks all you want, says the politicians’ handbook, but taking any of their market share or tainting their pure commercial judgement are taboo.
Does that mean ‘UK KfW’ should lend only to companies that can’t get finance from commercial banks? That idea is appealing in a way, especially as a temporary measure to get the country out of recession.
But with a mountain of debt to repay and public spending to cut, Osborne doesn’t want to start adding a lot of risky loans to his balance sheet.
That makes subsidising loan rates — as the Treasury is already doing through its Funding for Lending scheme — a more likely option.
At some point, the new bank would also come up against EU state aid rules. But KfW provides a very useful template for how such a development bank can operate within those rules.
Chalk and cheese
A more fundamental problem is culture. You have only to read a description of KfW’s varied, carefully targeted activities, from investing in housing to renewable energy, to realise that the bank embodies the German economic values of patient, prudent long term thinking. Its calm, unflashy style is the very opposite of the UK business culture whose paragons are Sir Richard Branson or Sir Stelios Haji-Ioannou.
If the real KfW could be transplanted to the UK, it would be a wonderful thing, introducing a new strand of German thinking to the British mix, which of course has its own virtues.
But that could only happen if the government had that in mind as a deliberate aim. It hasn’t. The British version of KfW is likely to be cheaper, quicker and shoddier — and so will do little to change the mindset of industry or corporate finance.
Pushing on a string
Instead, this is roughly Osborne’s fourth attempt to answer a different question — how to get the economy motoring by promoting lending.
Sadly, that is the wrong question. Except in the realm of personal mortgages — a market that may be stimulated by Funding for Lending — creditworthy borrowers in the UK can get access to funding. The banks are feeling the political and media pressure keenly and are striving to lend.
The low rate of corporate insolvencies suggests either that banks are being kind to companies, or that, helped by low interest rates, firms remain good credit risks. They are not borrowing more because they don’t want more money.
Policymakers and leader writers will keep wringing their hands and demanding ever more action from governments and central banks to stimulate the economy through debt.
It isn’t going to happen – and it shouldn’t. The UK, like the US and much of the rest of Europe, already has too much debt. Spending and investment are being depressed by the expectation of future austerity, and by fear of economic chaos in Europe.
If George Osborne wants to help the UK economy, he should get across to Brussels and start talking about UK backing for a sensible package of long term support for weak EU nations — in return for firm reform commitments.
Instead, he’ll kill time with another puppet show in which the government’s Punch and the banks’ Judy slug it out over who is to blame for a non-existent lack of credit.