• What Happened to the Money?

    Larry Elliott is right to ask in Tuesday’s Guardian why 16.5 billion of quantitative easing made available by the Bank of England to the commercial banks through the funding for lending scheme has failed to show up in increased lending to the small and medium-sized businesses which desperately need a boost to their available funding. He is also right to dismiss the lame excuses offered by both the Bank of England and the commercial banks to explain why such lending has actually fallen rather risen since the same time last year.

    We are, of course, all paying the price, in a slower recovery from recession, higher unemployment, less investment and more business failures, for the fact that this resource, rather than being used, languishes in the banks’ coffers – so we all have an interest in why it has happened. The bad news is that the reasons for it are part of a much wider and longer-term picture.

    The excuses trotted out include the age-old claim by British banks that the comparatively low level of their lending to business does not evidence any reluctance to do so, but merely a shortage of demand – or, to put it another way, a shortage of suitable projects on which to lend. But no sense of this can be made unless we know not only how much is available to lend but also – and more importantly – the terms on which the banks are offering to lend.

    And that is precisely, of course, what we are not allowed to know. The banks are always very coy about the terms they offer. But, in the absence of information made available by the banks, we are entitled to make some assumptions on the basis of what is known of the long-term attitude of the British banking system to lending to industry.

    The information that is available shows that, by comparison with other and more successful economies, our banks lend over a shorter term – the repayment period, in other words, is shorter. This means that the annual repayment costs of bank loans for British firms over the life of the loan are much higher, the adverse impact on cash-flow is therefore more severe, and the need to make an immediate return on investment (and a quick boost to profitability) is much greater.

    My colleague, George Tait Edwards, has shown that annual repayment costs that are two, three or even five times lower are a large part of the reason for the greater amount and ease of bank borrowing enjoyed by businesses in, for example, Germany and Japan, and in the new powerhouses of China, Korea and Taiwan – and that is, of course, why they are able to buy and make a profit from our failing assets.

    This is the fons et origo of the much-lamented British disease of short-termism. For many British firms, short-term cash-flow or liquidity is at least as important as longer-term profitability, because it is literally a matter of life and death. It is a factor that both inhibits the willingness to borrow (and therefore the access to essential investment capital) in the first place, and – if the loan is made – greatly increases the chances that it will not and cannot be repaid in accordance with the loan period and terms insisted upon by the banks.

    If, as is all too likely, a business borrowing on these terms runs into difficulties before the return on the investment funded by the borrowing becomes available, the news gets worse. British banks, unlike their overseas counterparts, show little interest in the survival of their customers. Their sole concern is to recover the loan and interest payments due to them over the short period specified in the loan arrangement. If that means receivership or liquidation – even if the business had a good chance of survival were the investment plans funded by the loan allowed to proceed – so be it. The banks can console themselves not only with the return of the loan and other payments due to them sooner than if the business had been allowed to survive but also with the money to be made from the disposal of the assets (sometimes to foreign buyers) and the receivership process.

    Many people are vaguely aware of these factors but our lack of interest in what makes competitor economies more successful than ours – indeed, our conviction that we have nothing to learn from them – blinds us to these truths. It is time we opened our minds and demanded better from our banking system. And shouldn’t these decisions in any case be taken in the public interest and not those of self-interested bankers?

    Bryan Gould

    4 June 2013

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