The task is obvious.\nTo avert permanent economic damage during the worst slump for 300 years, the\ngovernment has to provide emergency credit to business, guarantee loans, offer grants,\ndefer tax and rate payments and directly pay the wages of furloughed workers.\nTo its credit the Treasury has tried to rise to the challenge. On top the Bank\nof England has launched a range of innovative financing vehicles, including\nstepping up its purchases of commercial bills. The problem is less their\nintent. It is rather that over decades Britain has consistently refused to\ncreate the necessary financial and institutional piping through which such\nnecessary monies can flow in normal times \u2013 let alone at a moment of acute need.<\/p>\n\n\n\n
Symbolic of the failure was that Britain\u2019s 10,000\nbank branches were not seen alongside petrol stations, supermarkets and\nhardware stores as offering a core economic function that needed to be kept fully\nopen during the lockdown, instead of closing or opening part-time. Of course in\na way the government was right. Bank branches in Britain have long ceased to be\nhubs supporting local enterprise: they now largely exist to process the\ndocumentation associated with providing mortgages or the odd financial transfer\nthat does not lend itself to automation \u2013 hardly needed during lockdown. <\/p>\n\n\n\n
But that is indicative of the problem. The\nBritish financial system\u2019s long standing dissociation from the real economy of\ninnovative wealth creation while embracing real estate lending in incredible\nvolumes has widened over the last 30 years. The government may want to use\nbanks as the pipes through which it can channel vital emergency credit to\nbusiness. But the pipe network barely exists, and even where it does the pipes\nare shrivelled and silted up.<\/p>\n\n\n\n
British clearing banks know their business\ncustomers largely as notations on centralised data bases. It is expensive and\ntime-consuming to organise sophisticated credit scoring of business borrowers,\nlet alone to get to know their business models, their leadership teams, their\nstrategies and sales prospects. Indeed beyond London and the South East there\nis very little net ending to small and medium sized enterprises ( SMEs) at all.\nCredit scoring of small and medium sized companies is contracted out to\nagencies like Experian who have industrialised the process, or for larger\ncompanies left to the tender mercies of credit rating agencies. Banks want to\nconserve their capital and deploy it to maximise their financial returns, and\non top regulators insist that the risk weightings associated with much business\nlending, especially SMEs, are significantly higher than those on real estate\nlending.<\/p>\n\n\n\n
Lending to business is\nthus risky, low margin and expensive in terms of foregone opportunities to use\nscarce capital on more profitable lending to property. On top the banks suffer\nthe same disability as the rest of Britain\u2019s quoted companies: they have no\nanchor \u201cblock-holder\u201d shareholders but rather the same shifting, often anonymous,\nshareholder base of institutional investors who, with honourable exceptions, are\ndisengaged from the companies in which they invest and largely ignore their\nstewardship obligations. Their interest is in short term share price performance.\nWhere the banks do have large shareholders they are \u201c activists\u201d insisting that\nthey promote even more short term profitability by even more disengagement from\nbusiness lending.<\/p>\n\n\n\n
Government schemes to help de-risk business\nlending \u2013 typically various business loan guarantee schemes \u2013 are themselves\nexpensive, with the costs displaced onto the business borrower. Small wonder\nthat of the \u00a31.7 trillion of loans on British bank balance sheets in 2019 some\n\u00a31.45 trillion were represented by mortgages. Lending to small and medium sized\nbusiness stood at some \u00a3160 billion, of which \u00a3110 billion was real estate or\nproperty related. Manufacturing lending totalled \u00a310 billion. Net new lending\nto the entire sector stood a miserly \u00a315 billion over all 2019, a fraction of\nthe credit advanced by regionally dispersed German banks \u2013 many co-operatively\nor publicly owned . To explain Britain\u2019s much criticised incapacity, compared\nwith Germany, to manufacture vaccines, ventilators, masks, testing equipment\nand PPE, you need hardly look beyond these figures. <\/p>\n\n\n\n
The British Business Bank, set up by the\nCoalition government to plug the gap, is a misnomer in terms: it has been\ndisallowed from doing any significant lending itself after intense lobbying by\nthe banks who complained it might displace the private sector so that its principal\njob is to broker financial support, in particular government schemes, to particular borrowers that would otherwise\nnot have known of them \u2013 a job which its\nsome 300 staff in London and Sheffield do effectively. But besides public\nbusiness and development banks in other countries \u2013 Germany, Holland, Sweden,\nSouth Korea, Japan \u2013 its size and scope is an embarrassment. <\/p>\n\n\n\n
The necessary transformation of the entire\nsystem requires action on a number of fronts. In response to the crisis the\nTreasury has introduced Covid Business\nInterruption loans (CBILs) that companies can apply to banks for. To support CBIL lending the Bank of England has launched a new Term Funding scheme for Small and Medium\nSized Enterprise (TFSME) that banks together with relaxing capital requirements\n( and requiring the suspension of dividends), the Bank says could boost lending\nto \u00a3190 billion to SMEs over the next\ntwelve months \u2013 as it dryly observes, 13\ntimes more than the banks managed themselves over all of 2019. But as banks\nconserve their capital, they have little appetite to increase their lending 13\ntimes \u2013 the scale that is necessary. In\nthe most recent week banks lent \u00a31.3 billion: weekly lending needs to run at ten\ntimes the rate \u00a312-15 billion \u2013 as much as banks lend to SMEs in a year – if by mid-summer there is not to be an\navalanche of closures and redundancies. <\/p>\n\n\n\n
To dynamise what is\nhappening he Chancellor should chair an emergency task force tasked with driving\nlending up by the day, to be monitored with the same intensity we monitor Covid\ntesting. The British Business Bank, miniscule compared with industrial\ndevelopment banks in other countries, needs immediately to be given the mandate\nand capital to increase its own lending ten times \u2013 across the country. It must\nbe tasked with getting the money to where it is needed across the country\nbeyond the south-east \u2013 with the banks cajoled into becoming active partners. It will be a transformation of the role of the\nBBB into a fully fledged development bank in a matter of weeks \u2013 but if the\narmy can build Nightingale hospitals at such speed the BBB must rise to the\ntask in its sphere no less quickly. Its lending should not just be about\npreserving viable businesses: it should be thinking of supporting firms,\nespecially SMEs, in key sectors, especially those identified as priorities by\nthe Industrial Strategy. The MacMillan Committee recognised the problem ninety\nyears ago. It is sad that it has taken a pandemic to trigger the necessary\naction. <\/p>\n\n\n\n
Secondly bank shareholders need to say more\nvocally and publicly than they have hitherto that they will support banks as\nthey lend to distressed lenders. It is a public interest function. As fast as\npossible a new Companies Act should require banks retail and commercial arms,\nas discharging core economic functions, to incorporate as public benefit\ncompanies whose task is first and foremost to transmit money and credit to\nachieve public interest outcomes. Profit will follow from the delivery of\npurpose. The Act should also lay a responsibility on shareholders actively to\ncurate and steward the companies in which they invest, ensuring that they\ndeliver on the purpose for which they were incorporated. Britain will thus create\na new generation of commercial banks that\nserve the economy and society. Many good bankers would welcome the change. <\/p>\n\n\n\n
Thirdly it is no longer exports that requires\nfinancial guarantees. The fourth industrial revolution is being driven by scientific\nadvance. Intellectual property rights need to become as good as collateral as\nproperty, so that the risk weightings on both are the same. A transparent\nmarket needs to be established in intellectual property rights ( as Big\nInnovation Centre has consistently argued) so that they can be fairly valued,\nand then crucially insured by government just as it does exports, to create\nbankable low risk weighted collateral. This insurance function can also be\nextended to the top slice \u2013 say 20 per cent \u2013 of other loans to small business,\nso that insured IP loans, insured SME\nloans and eventually British Business Bank TFSME loans can be bundled together\nand sold as bonds to the UK insurance industry, allowing it to diversify part\nof its \u00a31.9 trillion holdings of financial assets into bonds that directly\ncreate real wealth, with the funds recyclable for a fresh round of financing. The insurance industry should not be allowed\nto stand on the sidelines. <\/p>\n\n\n\n
Some companies will\nnot want loans, but equity: the venture capital and private equity industries\nmust transmute themselves from their default role as predators and asset\nsweaters to long term patient investors \u2013 working with the newly created Futures Fund to take generous equity\nstakes in companies in need. Supporting\nintellectual capital rather than seeking property collateral should be new\nNorth Star of British finance<\/p>\n\n\n\n
If there is not to be a terrifying slump followed by stagnation, the British financial and ownership system needs a revolution \u2013 and to take place in mere weeks. Good people abound in it, marginalised until now by the predominant culture of wealth extraction. They need to be unleashed. These measures taken together would transform the piping of the British financial system. Instead of being an engine to inflate property prices, it would become an engine to promote innovative enterprise \u2013 a crucial component of the economy the UK need to grow not just to avoid deep economic scarring in the months ahead but to support great businesses, jobs and livelihoods in the future. Once we get to the other side, the new systems of engagement and support need to be retained. Good, after all, might come from all of this pain. <\/p>\n\n\n\n
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