Welcome increase in demand for credit; supply must follow suit

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Today's Bank of England Credit Conditions Survey for 2013q2 provided welcome news that demand for credit is rising as firms' confidence to invest starts to improve.

Other highlights from today's survey included:

The overall availability of credit to the corporate sector has increased primarily driven by better economic news but also by competition in capital markets;

Availability increases were across all firm turnover sizes (<£1M, £1M-£25M, >£25M) - but much more pronounced for larger companies;

Spreads over reference rates decreased by a lot for large companies, a little for mid-sized companies, but were hardly changed for small businesses;

Demand for credit was higher for firms of all sizes - but for mid-sized and large companies demand was at its highest since 2007;

Demand is expected to continue to rise in 2013q3 - especially for larger firms.

A few thoughts on these results revolving around my general obsession with improving SME finance through more competition and diversity within and beyond banking.

1. Competition is an important driver of better availability of credit (and better terms and conditions and lower prices). We want to see this competitive pressure applied between finance-provider types (e.g. banks v non-banks) as well as within types;

2. There is no sign yet of FLS causing banks to prioritise increasing their net lending to SMEs - an indication that the government was right to increase the incentives for doing so at the end of April. Clearly benefits so far are flowing through mainly to households and larger corporates.

3. The BoE's survey is a timely rebuttal for recent claims that contractions in net lending to SMEs are solely a demand-driven phenomenon. Clearly with economic conditions still precarious demand is part of the picture - but building demand with at best modest supply responses in this survey suggest a mixed picture.

4. FLS and the Business Bank are the government's main short and long-term access to finance interventions respectively (even if FLS is so-called 'monetary activism' rather then pure government policy). But the missing picture is a strong stand on improving competition in UK retail banking. The recent challenge from the Parliamentary Commission on Banking Standards that the government must do more in this area requires a positive and swift response.

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