This week Britain’s business secretary, Vince Cable, announced the creation of a government bank for small business. It will start with a clear balance sheet and bypass the ‘broken banking system’ that has failed to deliver credit to the countries squeezed businesses.
This is a sensible idea and it’s been a long time coming. Okay, it’s only got a billion in public funding to start with, pocket money in banking terms, but it’s a start.
The problem we’ve had with the banks over the last few years is that they are trying to recapitalise after the big losses of the financial crisis. Many of them stayed afloat by rolling maturing debt on by five years, and those repayments have to be their priority, rather than new lending. The government has talked a tough game, making deals with the banks to encourage them to lend in return for us leaving their bonuses alone, Project Merlin and other such magical schemes. The simple reality is that the banks can’t recapitalise and lend at the same time, no matter how loudly we insist that they do.
The complications in the banking sector have manifested themselves as a credit squeeze for consumers. Mortgages are harder to get and come with less generous terms. Businesses find their banks reluctant to extend credit. The tragedy for small businesses is that many of them rely on cycles of credit and repayment in the course of the year, to even out cashflow, to buy stock or raw materials. That’s normal, but when banks suddenly don’t lend, perfectly viable and profitable businesses can’t function. The crisis was created by cavalier lending, but responsible and irresponsible borrowers were punished alike.
One of the simpler solutions, on paper at least, has been for government to step in as a lender to house buyers and small businesses. It would be low risk, and would generate a profit for the Treasury, which is obviously a fine thing when you’ve got a deficit to rebalance.
The other reason why it was such a simple solution was that the government had a bank ready to go. In 2008 Northern Rock was nationalised, so the government owned it and could have done whatever it wanted with it. It dabbled with the idea of funding new mortgage lending through Northern Rock, but it was always managed at arms length, and was sold off to Virgin at a loss at the end of last year.
Hmm, something of a wasted opportunity there, and it wasn’t the only one. The previous year I got quite excited about a proposal to turn the Post Office into a ‘People’s Bank’. The Post Office has branches all over the country and already offers loans and accounts. It could have been upgraded to a fully fledged bank, right at the start of the crisis, bypassing all that was to come. The Labour government read the proposals and decided not to pursue it.
Then there’s RBS, which hit the buffers in 2008. The government poured in its bailout monies in return for almost 60% of the bank. That’s a majority stake, but again it was a very hands-off approach, as it has been with our 43% stake in Lloyds TSB.
Those opportunities somewhat overshadow this week’s announcement, because if we’d moved earlier on this, plenty of jobs and businesses could have been saved. What a shame to be launching a modest little business bank this week when we had a proper state run bank this time last year. A little boldness and creative thinking five years ago, and that People’s Bank could be open on your high street today.