Businesses advocate a state-backed bank

Posted on 3 Sep 2012

Following the market failure in 2008 that has stunted lending and led to a lack of trust in keeping money with banks, the British Chambers of Commerce argues that Britain needs a state-backed business bank to support new and fast-growing companies.

Existing financial institutions, including the high street banks that historically financed most business expansion, have a lower appetite for risk than they did in the past, with loan books significantly smaller than they were and continue to contract.

Loans have continued to contract in recent months with access to finance for fast-growing technology firms.

These new companies often find it difficult to obtain finance as they have a limited track record seeking or obtaining credit, but private equity fails to pick up the slack due to the current business environment. This is starving high-growth companies of the investment they need to make to bring products to market.

Published by the Department of Business, Innovation and Skills earlier this year, the Breedon Review carried out by the CEO of Legal & General Tom Breedon, reported that no other country has seen banks deleveraging (cutting balance sheets) on the same scale as the UK.

SME loan rejection rates in the UK are higher than in other European countries despite being overwhelmingly reliant on debt when they seek external financing.

Breedon suggested that UK SMEs alone face a finance gap of up to £59bn within five years earlier in the year and British Chamber of Commerce believes that risk appetite among banks will continue to decline.

It cites new domestic and international regulatory regimes, shareholder demands, and ever-higher capital requirements further constrain capacity to lend over the coming years.

Banks require more information before approving credit facilities since the financial crisis in 2008 and are more likely to use imperfect information as a justification for rejection rather than incur the cost of assessing risk more fully.

Certain sectors (such as construction, manufacturing and hospitality) seem to suffer from a negative bias, tending toward swift rejection and there are greater security requirements when facilities are offered.

The business network has published a statement issuing the following messgage to Prime Minister David Cameron and Chancellor George Osborne. “A strong business bank could be your legacy to Britain. It would be the corner-stone of a truly business-friendly environment, helping to nurture Britain’s growth companies more sustainably and over the long-term.”