The on-going trends in lending

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The Bank of England's Trends in Lending publication was released today.

It covers developments in lending to businesses and individuals up to the end of May 2013.

Incorporating the Bank's Credit Conditions Survey from earlier this month, Trends shows that despite lenders reporting higher demand, once again net lending to UK businesses in May contracted, this time by £3.8 billion. The three month annualised growth rate of 4.1% was also a little higher than the averages for 2013q1 or 2012.

The publication includes a special box on lending to SMEs and highlights some familiar points:

Bank agent's are reporting greater use of alternative sources of finance apart from banks such as peer-to-peer lending, crowd funding;

SMEs are also relying more on internal finance - and the BBA reports SME deposits growing at 5% pa since 2012H2;

There has been little change in elevated fees for SMEs post-crisis;

The BoE again highlights NIESR research this year that showed that relative to the pre-crisis period - even before the credit glut of 2004-07 - costs are higher now for SMEs

None of this is particularly surprising and indeed a similar characterisation could have been made of SME access to finance for most of the period post 2008/09.

For many firms - probably most firms - the dominant driver of their decision of whether or not to borrow money to invest is the economic climate they find themselves in and it's no secret that has been very challenging.

And yet supply conditions are also clearly playing a role.

The funding environment for banks, which became constrained enough last year for the government to introduce its Funding for Lending Scheme to prevent higher lending costs seeping into the real economy, is hopefully not a permanent feature of the funding landscape.

But the reaction to the FLS scheme is one response that has highlighted some underlying structural weaknesses. The reluctance of participating institutions to prioritise lending to SMEs rather than households, compounding the reluctance of firms to borrow, partly reflects a long-term trend away from investing in capability in this sector from lenders - who maybe perceive too little return from the detailed assessment of loans to small businesses.

So it's right that the government - and the financial sector - think about ways of diversifying the types of products and providers available to SMEs.

Yet banks will remain the dominant lenders to SMEs for the forseeable future and within the banking sector, five institutions hold about 70% of the stock of lending to SMEs and a 92% share of business current accounts. In this context, the sensible thing for the government to be doing would be to put increasing competition at the heart of its policy approach to increasing SME access to finance.

So the government response this month to the Parliamentary Commission on Banking Standards recommendations regarding competition was a bit underwhelming. With the Lloyds sale to the Co-Op falling through, the central plank of John Vickers recommendations for boosting competition in 2011 i.e. the creation of a serious scale challenger to the incumbents looks to have failed.

Assuming we don't want the disruption of a competition investigation of SME banking - which may yet be required - then I think we need to be throwing everything at the competition issue short of that.

Yes the government has said it should be a priority for the new payments regulator to look at the case for full account number portability as a matter of urgency.

But we need more than that. The government should also be studying the merits of a common utility platform, as suggested by the Parliamentary Commission.

And as we have previously suggested why not consider a time-limited incentive to firms to encourage them to switch banks by offering a matching government payment for any savings they can secure (up to a cap)? At the worst such a proposal would deliver a targeted cash boost to companies with enough initiative to search out a better deal. At best it would introduce much needed dynamism into SME banking.

We also think we need a more comprehensive examination of barriers facing new entrants setting up competing operations in the UK. There has been some progress following the FSA's review of capital requirements but more can be done here e.g. looking at the case for sharing branch infrastructure especially where that's publicly owned e.g. the post office network.


Media Team 020 7654 1576

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