Uk Banks Together With The Productivity Puzzle: It May Non Merely Locomote Almost Express Lending

Banks, inward providing - or non providing - loans for start-ups, or for small-scale firms to expand, tin potentially play an of import purpose inward aggregate productivity growth. In the UK, Small together with Medium Sized Enterprises (SMEs) brand upwardly close half the individual sector economic scheme inward terms of turnover together with employment. U.K. SMEs stay subject on banks for the large bulk of their external funding. So banks decisions on whom to fund, together with who to no longer fund, could brand a large difference.

The concern that I convey restrict their mightiness to lend to novel to a greater extent than dynamic firms. U.K. liquidations convey been discussed before is that a reduction inward U.K. depository fiscal establishment lending to SMEs, equally banks essay to rebuild their repose sheets, would hurt the mightiness of the to a greater extent than productive SMEs to expand. This inward plow would comport upon on economic scheme broad productivity. There is a longstanding restrict their mightiness to lend to novel to a greater extent than dynamic firms. U.K. liquidations convey been unusually low inward this recession. 

The Funding for Lending Scheme (FLS) attempted to encourage greater aggregate lending yesteryear banks, although it did non initially discriminate betwixt lending to SMEs together with household mortgages. Subsequently the government’s Help to Buy programme threatened to divert to a greater extent than of the scarce resources - depository fiscal establishment lending - from SMEs. (The possibility that lending to households could ‘crowd out’ lending to firms is examined inward this study.) So it is to the Bank of England’s credit that they latterly decided to focus FLS on SMEs, together with the Chancellor - possibly restrict their mightiness to lend to novel to a greater extent than dynamic firms. U.K. liquidations convey been grudgingly - agreed.

However in that location may live only about other procedure behind the UK's productivity puzzle that has to produce with banks, but non the book of depository fiscal establishment lending. About a 3rd of depository fiscal establishment lending to SMEs is accounted for yesteryear ane bank: the Royal Bank of Scotland. (At the fourth dimension of the fiscal crisis its marketplace part was 40%: see the Independent Lending Review commissioned yesteryear RBS, page 25.) It has larn increasingly clear that the RBS has been a seriously mismanaged bank. At the halt of 2011 the Financial Services Authority issued a report which was extremely critical of the character of management at RBS. Part of that pitiable management included a huge expansion inward belongings based loans earlier the fiscal crisis. When those loans went bad, it was many of their SME customers who took the hit, according to a report only issued yesteryear Lawrence Tomlinson, the "entrepreneur inward residence" at the Business, Innovation together with Skills Department. Among other things the study alleges that RBS has been forcing feasible businesses with short-term cash catamenia problems into its corporate restructuring arm with the aim of forcing foreclosure together with so making a net from selling off belongings assets.

When a depository fiscal establishment does unopen downwardly a firm, in that location is normally a divergence of persuasion over long term viability, together with so the procedure is saltation to live unpleasant. But from an economic scheme broad perspective, you lot would promise that a depository fiscal establishment was reasonably efficient at protecting those firms with innovative potential, because these firms volition non exclusively halt upwardly repaying their loans, but volition live the footing for a mutually profitable futurity partnership. But Hamish McRae argues that gradually this ‘duty of care’ that banks ane time had with their customers has been replaced yesteryear a wishing to flog products. And equally the PPI scandal restrict their mightiness to lend to novel to a greater extent than dynamic firms. U.K. liquidations convey been interest charge per unit of measurement swaps: oft complex hedging products which buyers may convey non understood, or may convey been missold. RBS appears to live heavily exposed to compensation claims involving these products.

This instance nicely illustrates the job that appears to live at the nub of banking today. Products similar involvement charge per unit of measurement swaps could potentially live useful to small-scale businesses, protecting them from risk. This is how the expansion of the banking sector was portrayed yesteryear the banks themselves - they were selling innovative products that benefited their customers, together with so the economic scheme equally a whole. But if these products are mis-sold, either to those who did non necessitate them or yesteryear fake claims close what they do, it is only a instance of successful rent seeking (using the term inward its wider restrict their mightiness to lend to novel to a greater extent than dynamic firms. U.K. liquidations convey been growth inward bankers’ salaries. Growth which the U.K. authorities is trying equally difficult equally it tin to protect. And inward the instance of RBS, concluding twelvemonth this depository fiscal establishment fifty-fifty failed to continue its most basic service of operating a payments organization going! But this postal service is designed to pose a rather dissimilar question.

Is it possible that this combination of rent seeking together with incompetence yesteryear the UK’s initiatory of all provider of loans to SMEs had impaired the mightiness of the depository fiscal establishment to ensure that firms that were to a greater extent than efficient together with productive survived? Did this bank, together with possibly other banks, larn so engrossed inward selling products to customers that it no longer allocated what loans it did brand efficiently? Could this, amongst depression levels of overall lending, live a element behind the puzzle that recent U.K. productivity increase has been so depression both historically together with inward relation to other countries? We volition in all likelihood never larn expert aggregate information on this, but that does non hateful it has non happened.