by David Butler
The case for banking reform is one that, on the centre-left, does not require extensive repeating. The banks were central to the crash and have not been seen to have redeemed themselves. In particular, lending to small and medium enterprises has fallen substantially in the post-crash environment and was not particularly healthy pre-crash. It is into this sea which the good ship One Nation Labour (formerly known as Responsible Capitalism), under her captain Ed Miliband, sailed.
Small and medium-sized enterprises suffer from an inadequate supply of finance. The impact of this was captured in IPPR’s Investing for the Future report. SMEs are usually reliant on loan-funding and are unable to sell bonds or access other sources of capital available to bigger businesses. The report contends that banks have gradually been switching their activities towards loans and investment that offer bigger yields and more immediate profits, which has squeezed loan-funding to SMEs. Due to information asymmetry, banks have used a ‘tick box’ approach for making decisions on loan funding, which has result in a further structural shortage as many potentially good SMEs are shut up of the one-size-fits-all criteria.
Current government schemes to encourage SME lending do not appear to be successful. In the footnotes of the IPPR report, the authors quote an article in the Financial Times which claims that of the £100 billion in low-cost capital created by the government, banks plan to use up to £80 billion to replace existing loans backed by market-price capital. It is clear that simply giving cheap capital to private sector banks will not help. This has been matched by the continue fall in lending to SMEs captured by recent Bank of England figures. This lending problem is a constraint on future prosperity and do nothing to relieve the cost of living crisis. A new approach is needed. Ed Miliband believes that more competition will provide the answer.