Cable rehabilitates investment banking

 
Vince Cable

I have been a bit confused about what the new business bank being set up by the government will do, and I fear that is only in part because I have been away for a bit.

With Vince Cable set to announce today at the LibDems' annual conference that £1bn of public money will go into it, I thought I should try to find out a bit more about its aims and designs. So, for what it's worth, this is what I have learned.

First, this is an attempt at serious structural financial reform to provide longer term, stable loans to smaller businesses, not a quick fix. The bank will take at least 18 months to get going, so will do nothing to tackle the current perceived shortage of loans for smaller businesses (the Bank of England's Funding for Lending is the putative quick fix).

Second, it will not actually provide any loans itself. This will be a new private-sector investment bank (though, presumably for PR reasons, officials prefer to call it a "wholesale bank"), in which the government will have a stake of around a third. And it will buy loans that banks - including the High Street banks - have made to smaller companies.

The intention is that these would be longer-term loans with a maturity of about 10 years, that small businesses find hard to prise out of our risk-averse banks.

The new bank would then package the loans into bonds and sell them to investors, such as pension funds.

In other words, it is the latest initiative to provide the financial bridge that British industry has wanted for more or less as long as I have been conscious of the existence of British industry, viz long-term finance for growing companies from the institutions that invest for the long term.

To put it another way, it is an attempt to give securitisation - the packaging of loans in to bonds, the process that wreaked so much havoc in the 2007/8 financial crisis - a good name.

That is more than a vain hope.

Arguably one of the great weaknesses of the British and European economies is that capital-strapped banks play too dominant a role in the provision of vital finance to businesses (and households). For all that the US recovery is seen in the US as too weak, one of the reasons it has been stronger than Britain's is that Americans can in effect borrow from investors, rather than banks, in a way that does not happen here.

Unlocking the funding potential of British pension schemes and insurance companies may well be a good thing.

How much additional long-term lending could go to Britain's family-owned companies and their ilk? Well if the government's £1bn of equity and guarantees is there to absorb potential losses of - say - 10% on the value of the loans being made, then it could underpin about £10bn of incremental lending.

Which would be a useful addition to an under-developed market.

By the way, the reason the government wants to be only a minority investor in the new bank is that - with the public finances mending at snail's pace - it feels obliged to limit the exposure that appears on its own balance sheet to £1bn, not the multiple which may be provided to companies in the form of finance.

So there is a bit of creative accounting by the Treasury. But small companies won't give a damn, if - like their German and US counterparts - they get access to loans that can't and won't be withdrawn as and when they and the economy catch another cold.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 451.

    Small business and Start ups which have the highest growth potential are still very unlikely to see any benefit from this as long as the banks are the intermediary. Too little too late and without taking the reins the gov't will make little change.

  • rate this
    0

    Comment number 450.

    This is what happens when you artificially manipulate the price of money.

    http://www.bbc.co.uk/news/world-europe-19712203

    Say bye bye to your assets, sovereignty, liberty.

  • rate this
    0

    Comment number 449.

    Oops. I meant the government should ensure that its accounting does not postpone any programme costs to the future. BTW Korea did some small business loan securitisation - before the financial crisis. Would someone provide an update on that experiment?

  • rate this
    +1

    Comment number 448.

    435. Fred.

    Seriously? Have you been asleep for the last ten years? It matters not a jot, the banks get paid! Whether with our money or OUR MONEY. Moral Hazard? We are a long way beyond that point. We already have a UK Fred and Fran, they are supposedly private institutions 85% owned and further guaranteed by the taxpayer... are you bonkers or blind?

  • rate this
    0

    Comment number 447.

    427. CO (Salute). A poetic evening of gems.

    Mr. Peston, my sincere condolences.

    The issue will be the staffing and who is chosen to swim with the incestuous cabal in the City. Securitisation means little if others don't buy the packaged paper, poisoned chalice? A helpful hint - get people to put their names to them this time, nobody signed off last time, there's an FSA paper on it c.2003.

  • rate this
    0

    Comment number 446.

    QE 4ever.

    In the new banking model risk and reward have become totally divorced from each other. Tax payers take the risk while bankers keep all the reward.

    + no end in sight while the banks and their fawners have all major political parties in their pockets.

    Until things reach a breaking point...?

  • rate this
    0

    Comment number 445.

    Great that Mr Peston is back. Securitisation is a good way to leverage the limited government funds. But it has its risks. Presumably the bank will hold the bottom tranche and the government will act as the bank's and bonds guarantor. The government should ensure that the bank’s accounting does not postpone costs to the future i.e. the accounts should have provisions for contingent liabilities.

  • rate this
    0

    Comment number 444.

    Frederic@440
    We agree!

    A certain enjoyment in fine writing of nineteenth-century namesake, valiant in its way, missing the discipline of questions other than those suggested from contemporary sensibility

    Every extension of the vote - "fatal principle' - the occasion of frenzy!

    Exaggeration, with though more than a grain of truth

    With blind gradualism, pressures build, one-day to explode

  • rate this
    0

    Comment number 443.

    What have all these "new" lending schemes got in common?

    Yes. You guessed it. They are all explicitly taxpayer backed.

    I wish I could run my life like that. And bonuses too!

    See the happy spiv. He doesn't give a damn.

    I wish I was a spiv.

    Good grief. Perhaps I am.

  • rate this
    0

    Comment number 442.

    Frederic@440
    "interpretation"

    Jefferson views subject to change, as I hope ours, from experience & argument if also from lesser

    Effort here not 'academic', not for 'the interpretation' of 'revered text or figure'

    Sympathise with 'schooled', disciplined by subjects, tutors, syllabi
    Always 'out-of-date'
    Supposedly taught to 'think'
    All too often crushed

    For 'The People', every one of us Free

  • rate this
    0

    Comment number 441.

    Frederic@438
    Thanks

    Instructive ancient struggles to spread power, to prevent or remedy oppression, successful in degrees, pointing to possibility of 'rule for the people', not by set-debate & direct-vote, but mainly by 'representation', not by 'grand persons, good but remote', by 'equal citizens, good and alongside'

    The 'equality' necessary: not just in voting, but in market power, Income Share

  • rate this
    0

    Comment number 440.

    @439.All for All

    Your interpretation is wrong. Jefferson loathed not only democracy but any centralised power, Federal Government. He drafted a form of Govt as small as possible to be as least of a threat to the free individual.

    I do enjoy Bastiat's thoughts on your favourite form of Govt mafia (Democracy):

    http://jamesongraber.blogspot.co.uk/2011/10/bastiat-on-democracy.html

  • rate this
    0

    Comment number 439.

    Frederic @432
    "more dangerous than armies"
    Jefferson bears re-quotation

    You see why "more dangerous"?

    Potential for "swindle' is of power, away from 'equality of political opportunity' (essentially of economic means), between generations & between 'equal citizens' in different sectors with different relation to the currency flows 'sustaining all'

    Hands in till v Hands in tillage v Arms in blood

  • rate this
    0

    Comment number 438.

    @436.All for All
    I'm still waiting for your response to @426.
    1) YOUR defiition of democracy?
    2) It's origins (Solon & Cleisthenes)?

    You avoiding defining what is "equal democracy" and "is guaranteed by equal share-holding"?
    You sound like a socialist but avoid embracing the hammer &sickle ☭.
    Democracy is the assault upon the minority's liberties.

  • rate this
    0

    Comment number 437.

    Best to avoid contributing to any pension fund that buys/invests in dodgy repackaged loans sold by Banks !
    Remember 2008 !
    The same people are still working the same way.

  • rate this
    0

    Comment number 436.

    Frederic@426
    "No definition of democracy"

    Clue @348 "trust in equality", All for All, able to represent all

    @350 "Equal Democracy"

    @357 "guaranteed by equal share-holding"

    @370 "next stage 'market equality', Adam Smith's dream"

    @400 Equality implicit in "security for all but lazy & criminal"

    Gettysburg: 'of, by, for The People'?

    Jefferson, contributor: equal 'opportunity', against privilege

  • rate this
    0

    Comment number 435.

    This creates a moral hazard. Banks lend out when their vaults have savings of their customers. If they make a bad loan, they risk loosing their customer's money. If they're given money by Govt to lend, they'll give increasingly risky loans because hey, it's not their customers' money, it's the tax payers'. We'll end up with UK Freddie Mac & Fannie Mae!

  • rate this
    +1

    Comment number 434.

    There is nothing wrong with leading for commercial investment in profit making businesses. But there is plenty wrong in the secondary market of securitisation of these loans and then betting on the securities with interest rare swops backed by theories about zero risk and on Libor at the same time.

  • rate this
    0

    Comment number 433.

    ComradeOgilvy @421
    "Licence they mean"
    Nevertheless, to be heard of course!
    Even with Equal Democracy, eternal vigilance

    @427 "such a one as she such is her neighbour"
    All the same!
    We compete both for privilege and in victimhood

    By 'civilisation', you will understand, 'towards civic harmony'
    (not ever 'quite there yet', asymptotic approach in Equality)

  • rate this
    0

    Comment number 432.

    Govt banks are always a disaster for free people.

    "I sincerely believe, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling the future on a large scale".
    ~Thomas Jefferson: Letter to John Taylor, 28 May 1816

 

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