Banker bashing has become a popular sport requiring obligatory participation for politicians of all political colours and the media posing as a convenient scape goat for all that’s wrong with the economy. Britain’s biggest banks are constantly berated for failing to lend more to SMEs.
But this is a rather pointless if not stupid debate. We are where we are to make a rather obvious point and rather than constantly demonising the big banks it might be worth considering why they’re not being that supportive of SMEs (if they ever really have) and to consider the alternatives.
For starters, much of Britain’s banking system became insolvent following the financial crisis requiring massive public support. The likes of Royal Bank of Scotland and even Lloyds Bank, which swallowed up Bank of Scotland, still require a long and painful rehabilitation process. They’re simply not in a strong position to boost riskier credit, which is what lending to SMEs effectively represents.
Risk discouraged
Secondly, all banks are being required to carry higher levels of quality reserves and also to curtail riskier activities. That means they’re geared towards capital conservation rather than loan growth.
Under Basel rules, a global set of rules for bank capital adequacy, SMEs are seen as high-risk borrowers. SMEs generally have no credit rating from the likes of Standard & Poors or Moody’s and therefore under Basel rules are considered high risk credits. That requires setting aside more capital against loans made to SME ie higher interest rates .
On top of that the big banks are paying for a range of self-inflicted wounds such as manipulating LIBOR rates through to the mis-selling of insurance policies – all of which is landing them with big fines and compensation payments ie making them less profitable and with less capital to lend.
Germany anyone?
So what are the alternatives? Look to Germany. They have an a government owned development bank called Kreditanstalt für Wiederaufbau (KfW), which amongst its various duties supports SMEs with a range of services including providing mezzanine finance and even equity funding. But one of the services it has been providing to German commercial banks is absorbing some of the risks associated with lending to that sector to lower the cost of credit to smaller businesses with some success.
Enabling some mechanism to repackage loans into bonds (securitisation) with a credit enhancement from a highly-rated UK agency might go some way to making more cost effective capital available to SMEs. Investors would buy these bonds. Crucially, this would bring in capital from outside the banking sector, though banks would still be the originators of those loans and retain some responsibility for their performance. The problem with all the various schemes the government has been implementing is that they don’t seem to be being applied with any enthusiasm at street level.
Innovation to the rescue
Then of course there’s innovation. Peer to peer lending seems to have a lot of potential, that simply involves pooling lots of small funds from individuals on an Internet platform to lend on to SMEs.
Yet another interesting innovation is crowd-funding, particularly for the smallest of businesses and start-ups. It partially fills the void left by venture capital, which preferred to invest in established business aka private equity.
Not economic
These are partial solutions, but more is needed. Another issue is the sheer concentration of power of the UK’s banking system, which is completely dominated by four big names. Aside issues of risk, the big four also don’t find it terribly profitable to lend to SMEs. Consider the administration involved in lending £100 million to 1,000 SMEs versus lending that sum to one big multinational. So it’s possible to argue that maybe Britain’s mega-banks are not well suited to dealing with SMEs anyway — they’re simply too big.
Again, Germany might provide some inspiration. The country has lots of smaller regional or even town specific banks where management is much more familiar with local business conditions and with the circumstances of individual businesses. The managers of those banks are better able to assess risk as they’re part of the community that they lend into, which is probably far more effective than applying credit scores.
There is certainly a niche in the UK for financing SMEs, which is desperately looking to be filled. But maybe what that requires is less strenuous banking regulation to encourage these new players with some strong government support.
But it will be challenging as the UK has an incredibly concentrated banking market. But rather than constantly berating big banks it would be much more useful if the government became a lot more proactive over incentivising capital to flow more readily towards SMEs. And no nationalising RBS and forcing it to lend is not an answer, just a recipe for more tax- payer misery when over-enthusiastic lending goes wrong. Lending based on sensible criteria and risk assessment is what is needed, not Soviet style ‘dirigisme.’
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Leveson inquiry: the traditional versus social media angle
by Justin on 29th November 2012
This blog will leave it to others to comment on the main thrust of the Leveson report’s recommendations. From a public relations / marketing perspective what was interesting is Leveson’s observations of the strengths of traditional media versus the social variety.
Certainly Leveson acknowledges that the printed press is no longer a unique medium where ‘public reputation’ is contested. But then observes: “But paradoxically, this may enhance the relative power of what remains unique about the press: a powerful, mediated partisanship which may indeed contain unspoken expectations of a tangible return.”
The capability to produce quality
Traditional newspapers, for all their faults, do largely adhere to certain editorial standards in terms of the quality of the information they source and how they then write it up. Also, is an anonymous Tweet or one by someone unknown about a certain event really more credible than an article published in the Times newspaper?
But the over-riding strength of traditional media, despite staff cut-backs, is that it can research and break stories in a way that most bloggers can’t – they simply don’t have the resources. And whereas bloggers often operate as standalone entities, a newspaper pulls together and directs many writers. In truth, the vast majority of what comes out of the bloggersphere is awful and useless. The little quality there is does tend to stand out, but is often very specialised in nature.
Democracy needs newspapers
Some of the practices of the tabloids such as phone hacking were truly dreadful, but as Leveson points out the press does still play a major role in holding rulers to account, which supports democracy and also educates, informs and entertains the public. The world would be a lot poorer if newspapers no longer existed and besides a great deal of the information, which circulates in the social sphere, is sourced from the traditional media. It forms the basis of many conversations and debates.
But Leveson makes another observation. He notes that in the main few tweets or social network pages are read by very large numbers of people and that a very small number of tweeters are followed — though not necessarily read — by very large numbers of people. That is very true. But the potential viral nature of social media should never be under-estimated. A video on Youtube that goes viral, rapidly passing from one person’s network to another, can end up being viewed by millions of people. When viral goes well, it is a dream come true for a PR or marketeer and the impact can be as powerful as being written up in a newspaper.
Social networks are different from subscribers
But most of the time like minded people use social media to find each other and exchange views and learn from each other and form relatively small often specialised networks. It’s about forming communities and engagement. From that stems a trust element, which is growing increasingly weaker toward the traditional media. It seems easier to hold a blogger to account in twitter-sphere where there is a certain peer pressure than a remote journalist at the Sun newspaper. Another difference noted by Leveson is that at least in the social media arena rebuttals and denials of allegations can take place instantly by those on the receiving end. Sometimes this can even kill the allegations off.
Traditional media’s revenue challenge
It is a popular view to see the traditional media shrivelling away in the face of the the explosive growth of the Internet and social media, which in some ways competes with the press by providing information for free rather than charging for it. Many UK newspapers barely make any money or even run at a loss. Also, several surveys have shown a growing distrust of the press by the general public and that has been accentuated by the salacious revelations during the Leveson inquiry over improper and intrusive conduct by journalists. The main problem for newspapers is less about building audiences – because they also use the Internet and social media – but how to monetise all those eye balls and that is proving to be a monumental challenge.
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