business economics

Finally, a government bank for small business

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.

11 comments

  1. How strange! Back in June your ‘Why The Banks Can’t Lend’ posed the question of why can’t the governments do it themselves, (as it would seem to be the best option). There was not a single reponse. Again you draw attention to this area, and no immediate responses so far. Are we not concerned with this striking question? Why have the governments not taken the obvious opportunities? The inexperienced me can only think of insufficient profit for too much cost, or the public reaction when/if they foul it up. Why isn’t anyone responding to the question? Why isn’t our Jeremy? Any offers?

  2. PS. Jeremy, Would it be possible to put a date on each of your posts in future? I know I’ve wanted it to be immediately obvious at times.

  3. Posts are dated in the web address, if you look at the top of your browser.

    Why haven’t we done this before? Probably because it’s against all the principles of laissez-faire economics, which suggests governments shouldn’t get involved. Running banks is not their expertise and the private sector would do a better job. Since the private sector has manifestly failed, I’d be willing to let government have a go – but I’m not after a government bank that replaces the commercial banks or centralises the whole thing into one big national bank. That would be a step backwards.

    Why no comment on these posts on banking? Not sure. Some interest people and some don’t so much. You can never tell what’s going to get a response, and banking isn’t the most thrilling of topics at the best of times.

  4. Thanks for your explanation. Regarding the dated posts – I receive your new posts by e-mail. They are dated at the bottom, no problem, but every time I take a link from these to one of your previous posts, they appear in the same format each time, without a date on your post, unless I scroll down to seek a dated response. Nowhere on the browser page either. Never mind, I doubt the solution is readily found.

  5. I have looked many times to no avail. But, ah!, have now discovered it’s not a question of looking, but of placing the cursor on it. It expands (for a few seconds only), to show more relevant info. including the date. That will solve my issue thanks. (Wonder why its not simply on the top of the post itself).
    Do you think Avaaz plans are excellent? Perhaps you’d be very useful for them too?

  6. The problem with government banks is that they are an irresistible temptation for politicians to lend to dodgy projects that buy them votes. These loans then cause big problems. Look at the Cajas in Spain. These were semi-public banks were run by boards whose members drawn from local political institutions, unions, the church, their own clients (drawn each four years at random), and business associations. Sounds lovely and no-capitalist and communal.

    Sadly they lent hugely to fund Spain’s property boom, including Castellón airport which since opening in 2011 at a cost of $183 million has no flights. The airport was built because the local political leader wanted it. Spain is bust because of these mutuals. Most shareholder owned banks in Spain didn’t go bust.

    We don’t need to repeat the experiment in the UK to know that state banks don’t work.

    1. Ah, because of course the private banks all lent responsibly in Spain, if I remember correctly!

      Of course a government run bank can go badly wrong, but that doesn’t mean it can’t ever be done properly. We’re talking here about lending to small businesses, not rash infrastructure projects. We’re also (probably) talking about something temporary, a bank that can see responsible businesses through a tough patch while the mainstream banks aren’t delivering.

      I actually share your scepticism, and I’m not in favour of governments running banks under normal circumstances, but these are extraordinary times and I think it has a part to play. It’s not the only answer to the credit squeeze – I think any alternative form of financing has a role to play, such as peer to peer lending and profit sharing schemes (rather than interest-based loans).

  7. Well yes, income tax was supposed to be temporary, and look how that turned out. But that doesn’t mean you shouldn’t try – and you can always do it partnership. This particular scheme will use both public money and private investment, and the private investors are going to be watching the scheme to make sure it delivers.

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