Clarifying the business bank debate

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Access to finance is a bit of a theme at the moment with all the talk of a 'business bank', a mystery further deepened by comments from Vince Cable not making it much clearer what this institution may look like.

Felicity wrote yesterday about the two broad options seemingly under debate for the business bank. These are the creation of an aggregation institution and the creation of a KfW-style state-backed investment bank.

Depending on the final form, Dr Cable's creation could be a valuable improvement to the UK financial landscape.

The thing that frustrates me a little about all this talk is the lack of clarity, not just from the government, about what a business bank might be trying to achieve.

There are multiple problems accessing finance in the UK but too many of them seem to be landed at the foot of the banking sector by protagonists of a business bank.

Some of the problems under discussion and my views on what the main issues are:

Finance for infrastructure - primarily it's about a lack of government cash and to some degree policy uncertainty for key regulatory frameworks e.g. electricity markets, climate change

Finance for innovation - long-standing issue because innovation is risky to finance. Perhaps more government support is needed (look at science budget vis-a-vis innovation budget), perhaps more needs to be done to encourage more private risk capital (Allister Heath lamented the lack of venture capital this morning).

Growth capital - similar to innovative companies (and often the same companies) companies looking for growth capital may represent a risk too far for conservative bank finance. The lack of capital for these companies has long been recognised - but a greater supply of alternatives to bank finance such as mezzanine or equity available from funds like the Business Growth Fund seems a better bet than a business bank.

Regional disparities - Differences in economic and social outcomes between regions seem primarily driven by skills, occupation, labour force participation, and productivity differences. Will this be fixed by a business bank?

Industry disparities - Vince Cable singled out 'manufacturers' and 'exporters' yesterday in his speech. While we certainly would like to see our members gain better access to finance, there doesn't seem to be a lot of evidence (for example from the SME Finance Monitor) that our sector is especially disadvantaged as opposed to SMEs more generally.

SME access to finance - this is the best candidate for a 'business bank' to focus on because I think there are real difficulties for SMEs trying to access external finance, for which they primarily rely on their banks. The rate at which loans are declined by UK banks doesn't seem to compare well even with European economies that have similarly challenging economic environments. Our banking sector is particularly concentrated. New entrants to SME banking find it very tough to attract customers off the incumbents. This is where I think the focus of debate needs to be.

So that's my little rant on being clearer about the problem.

When I have a moment I'll put down some thoughts on possible solutions because the other frustration I have about the 'business bank' debate is the unwillingness to properly consider the full range of possible interventions.

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