Banking on success?

The banks tell us not many businesses want to borrow money. Many have unused overdraft or loan facilities. They say there is money there if you want it. They have just announced a useful £1.5 billion equity fund for small enterprises.

Companies tell us there is a shortage of money to grow their companies. Some report facilities being withdrawn, high arrangement costs, and high rates compared to base rate if you do get a loan offer. Small entrepreneurs have to offer high levels of personal gurantee. Banks still seem to like property backing to loans, which may not always be possible in business.

So who is right? As always there is some truth in both these positions. I do think if we want faster growth there needs to be easier credit for business.

The banks are still slimming their balance sheets to hit ever more exacting targets from their regulators. RBS is slimming from £2.2 trillion to £1.2 trillion. It is a global bank, but some of that is liquidity withdrawn from the UK.

If the government wishes to speed things up it should ask the Regulators to call a halt to making the banks ever more prudent, at least for a year or so. If things start to warm up, then the Regulators should ask for more cash and capital to calm them down. The main reason QE has not fuelled a more rapid inflaiton is the strict controls on the banks lending it on. We do not need more QE. We need a sensible and controlled release of some of the pent up money already in the system for more productive uses.

Rumours are going araound that instead of doing this the Regulator is about to demand a still higher level of prudence. No wonder there are difficulties for businesses in getting access to capital.

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25 Comments

  1. Mick Anderson
    Posted October 17, 2010 at 8:12 am | Permalink

    When the Base Rate is is low, it bears virtually no relation to the interest rates for new borrowing in either business or domestic sectors. It seems to be purely for the benefit of the politicians. The only effect is that those of us who have been prudent enough to save a little over the years have been hammered, both by the banks and by the inflationary Quantative Easing.

    These absurd interest rates have been with us long enough that those who want to borrow under them (not at them – nobody in the real world can do that) have largely done so. Interest rates should have started to rise months ago. Regulate the banks so that they can't start charging borrowers more until the vast difference between rates charged and the Base Rate has closed up, and start paying interest on our savings again.

  2. AlteFritz
    Posted October 17, 2010 at 9:18 am | Permalink

    If all else fails, do you risk compelling state owned banks to reduce arrangement fees, or reduce the rate at which they lend? It would be good if capital requirements were eased, in effect, to leave no excuses for banks, but they are mighty arrogant institutions.

  3. Bill
    Posted October 17, 2010 at 9:45 am | Permalink

    One high street bank is asking a client for a – property – LTV 60% and a PG

  4. Acorn
    Posted October 17, 2010 at 9:46 am | Permalink

    We should not confuse liquidity with solvency. There are still truck loads of toxic assets in these banks. Should another shock hit the banking system in the next couple of years, they will have problems. Bank balance sheets are a work of fiction. No commercial bank wants the inflation that will come with releasing their reserves into circulation. Inflation is good news for borrowers; but, bad news for lenders. Banks holding their profits overseas, waiting for a more favourable tax situation to bring it home, is bad news for the economy.

  5. Norman
    Posted October 17, 2010 at 11:09 am | Permalink

    Another reason banks may be holding on to money is that politicians of every hue seem to be salivating at the thought of introducing populist tax rises on them. On top of this we have senior members of the coalition (including the Chancellor and Business Secretary) telling the financial sector that it is too big and needs cut down to size – and will be, using regulatory powers.

    Now we wonder why banks are preferring overseas investments to British ones.

    The continental countries (and especially Switzerland) must be rubbing their hands with glee. We've allowed regulation of the financial sector to be passed to the EU (with the sop that, initially, one of the offices will be in London) but even without that our own politicians are doing a fantastic job of making sure bankers get the message that, for them, Britain is most definitely not open for business.

  6. Lola
    Posted October 17, 2010 at 12:41 pm | Permalink

    Personal Experience. I am a small business. I have an excellent expansion plan. I have a strong cashflow and good balance sheet. The bank has made no attempt to understand my business and charges me base + 6% for an o/d and base plus 7% for a BDL. I have given up on them. I am now seeking capital elsewhere. I will never involve a bank in any business of mine ever again, except as a utility supplier of banking services. They. Are. Useless.

    • Stuart Fairney
      Posted October 18, 2010 at 8:03 am | Permalink

      Ditto. For a project I am involved with, the bank not only declines to lend in my sector entirely, (I later discovered) they just couldn't understand a pretty strightforward proposal document.

      If you know any, go to high-net-worth individuals as I did. You may find they are looking for somewhere to put their cash, as they also have little confidence in the returns offered by the banks.

    • Acorn
      Posted October 18, 2010 at 9:23 am | Permalink

      Lola; my mate in the car auction business, would like to know where you got so good a deal from a bank! 😉

    • JimF
      Posted October 20, 2010 at 6:18 pm | Permalink

      We have just been through a borrowing exercise in Switzerland for borrowing £400K for machines there in a start-up subsidiary of our UK-based SME.
      First away we received a "Trust" letter from the Swiss Bank which I didn't sign, but which let us borrow all the cash on a trust basis that we wouldn't let the subsidiary go down. No actual defined collateral, but I guess the Bank could have taken action against us on the basis of the signed docuument. My cautious self refused to sign but I proposed the Canton to guarantee 1/3, the Bank guarantee 1/3 and we guarantee 1/3 from the UK, loosely pledged against assets. They accepted,iInterest rate 2.5%, albeit in the strong CHF.

  7. simon
    Posted October 17, 2010 at 12:57 pm | Permalink

    It's not just about balance sheets and money .

    20 years ago , "bank managers" who were held responsible for their lending started being side-lined in favour of salesmen and women who were not .

    Banks no longer have people with the requisite skills to offer expert lending to small and medium sized businesses .

    It took the brightest people over 20 years to become a branch Bank Manager and these people have now retired or taken the skills to their grave .

    The culture which created them has long gone and Mr Mainwaring is not going to reappear overnight , if ever .

    We don't just need more lending we need better quality lending than has been happening over the last 15 years to both consumers and small businesses .

  8. Antisthenes
    Posted October 17, 2010 at 1:00 pm | Permalink

    The usual bureaucratic nonsense shutting the stable door after the horse has bolted and pursing policies in their interest and not the publics. Inadvertently creating institutionalised socialism, the bureacrats (state) know best. Time to let markets decide without interference of the state in any form had they been allowed to booms and busts and credit crisis would never occur to the same destructive levels. They would certainly have happened but only as corrections but not as full blown crises.

  9. bobthefish
    Posted October 17, 2010 at 3:21 pm | Permalink

    John, Bankers will lend you an umbrella until it starts to rain. Plus ca change….

  10. John Moss
    Posted October 17, 2010 at 9:02 pm | Permalink

    They are also widening their marginsd on currency transactions. £Currently, 1 = € 1.142*. Yet you can't get better than €1.07 at any bank. That is a 5% "commission" just for counting different notes.

    *BTW, down from €1.22 about three weeks ago – another 7% devaluation of the £ so more inflationary pressure!

    • Alan Jutson
      Posted October 18, 2010 at 5:28 pm | Permalink

      John Moss agreed.

      Also take into account if you want to change back into Sterling when you return, and its then over 10% thats gone in charges.

      No wonder people hang onto Euro's for next time !.

    • JimF
      Posted October 20, 2010 at 6:10 pm | Permalink

      You will get much better margins going through a decent Broker, although be careful… you shouldn't pay more than half a eurocent each way of spot

  11. Bob
    Posted October 17, 2010 at 9:23 pm | Permalink

    The trading and the traditional banking should separated, we should be able to choose between low risk low return and high risk high return.

    The de-mutualisation of the building societies was a huge con trick.

  12. Lottery balls
    Posted October 17, 2010 at 9:26 pm | Permalink

    The banks, nearly all of them, are not lending to me or people I know and are even demanding large loan reductions unrelated to risk. I have substantial property security available and a very good record for over 20 years. They have gone from lending me all I needed (up to 75% loan to value on property at about
    0 .8% over base) to not lending me anything above about 50% and with prohibitively large fees and margins even if they will. If they are not lending to me the only people who can borrow must be those do not want or need too.

    As a consequence I have delayed building work on several building projects and business investments for no good economic reason other than the bank restrictions. Perhaps 20 jobs lost directly and many times that I am aware of elsewhere.

    The banks are just lying in the ads as the figures clearly show.

    • Alan Jutson
      Posted October 18, 2010 at 5:31 pm | Permalink

      Lottery Balls

      Beware and always remember, an Overdraft is "Repayable on Demand"

      Banks can, and have, demanded immediate part or full repayment from a number of Businesses I know over the years.

  13. Conrad Jones (Cheam)
    Posted October 17, 2010 at 9:28 pm | Permalink

    I agree with you Mr Redwood, no more QE.
    There are a number of worrying concerns I have concerning the way our financial system is managed:
    1. The MPC (a group of nine unelected men) who decide whether the Government (Taxpayers) borrow huge amounts of money and then hand that over to the Private Banks – known as Quantitative Easing.
    2. The Private Banks have a track record of mainly lending to the Mortgage market. House Prices are still overinflated.
    3. Business Account loans have much HIGHER interest rates than personal loans and Business Accounts attract more charges. (This slows private enterprise).
    4. QE has had limited success – inflation is running at 1.1% over the Bank's own target figure of 2%.
    5. Why did Gordon Brown sell half the UK's Gold reserves, and where did it go? Why did Gold start to increase so much, as soon as he sold it?
    6. Is it really in the interests of the City of London to see other parts of the economy doing well – like manufacturing? As – if they do; the City's position of power is reduced. This has been the Trend over the past few decades and has speeded up over the last decade under Labour.

  14. Conrad Jones (Cheam)
    Posted October 17, 2010 at 9:42 pm | Permalink

    For me, there is only one way to Regulate the Banks.
    Withdraw the £200 billion pounds that we've "lent " them – including interest; then remove all lending restrictions – then garauntee all loans to Businesses and Private Enterprise based in the UK. Use the £200 billion pounds to garuantee these loans. If a Bank Fails – then as a private business – it will receive the same help that Rover received or the Steel Works in Port Talbot. Yes – there were some bad elements of Rover's management. Yes – there are bad elements of Bank management. And change the culture of the "have now – pay later" mentality and ecourage Businesses to use their own cash reserves for internal investment. Which was beginning to Happen at the start of the 20th Century in the US, prior to the Federal Reserve System.

    • Lola
      Posted October 18, 2010 at 3:31 pm | Permalink

      The real joke is that 'regulaitng the banks' causes them to fail. Read Mr Murray Rothbard – or simply observe recent history.

  15. Conrad Jones (Cheam)
    Posted October 18, 2010 at 9:00 am | Permalink

    Are the Banks deliberately holding on to cash as a threat to the Government to prevent higher Taxes being applied to their salaries and bonuses? All this under the cover of stricter regulations perhaps. The Bank's reason why inflation is so high is being blamed on higher commodity costs – like oil and farm produce. Isn't there a way of bypassing the Banks? If businesses are struggling (which they quite clearly are) why can't the Treasury issue loans direct?

  16. simon_555
    Posted October 19, 2010 at 8:05 pm | Permalink

    Low rates, which it appears the Tories want to preserve are going to end up producing an incredibly lopsided economy , one which discouraged and penalises prudence.

  17. Adrian Peirson
    Posted October 22, 2010 at 9:04 pm | Permalink

    Banks operate a system known as fractional reserve lending, if you deposit £100 with a bank,they lend that £100 out to TEN other people, IE most of what they lend out is thin air.
    This is fraud.

    So for those people with a mortgage that have paid 10% of the loan back ought to be settled.
    Anyone who has paid back more, now owns their house and is due a refund.

    http://www.cobdencentre.org/2010/07/the-battle-of-the-letters/

  18. adrian peirson
    Posted October 22, 2010 at 9:08 pm | Permalink

    The banks are holding onto the money so that when the system completely collapses, they will buy up the world for pennies, welcome to the new world order.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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