Carrots, sticks and banks

Vince Cable

One of the fault lines in the coalition has for some time been over the extent to which banks should be compelled to lend, especially to small businesses, rather than just being encourage to do so.

My understanding is that Vince Cable, the Business Secretary, remains concerned that the UK's economic recovery will remain insipid for months and years, unless and until banks provide the credit required by growing businesses.

He has long seen the case for the government to use Royal Bank of Scotland, in which taxpayers have a stake of greater than 80%, as an instrument of policy. This would involve forcing RBS to fill the gaps in credit provision in the UK.

On Cable's analysis, Royal Bank of Scotland has the capital and liquidity to provide loans needed by the kind of businesses that must thrive for positive momentum in the private sector to be established. What RBS lacks is the appetite for risk.

Nor, should I say, is Cable a lone voice on all of this. In recent months, similar concerns have been raised with me on the refusal of banks to provide credit where it is badly needed by senior executives at the Bank of England and the Financial Services Authority.

However, as of this moment, the government and Bank of England have eschewed the stick in their relations with banks and are instead dangling what the hope will be seen as a plump delicious carrot. The Bank of England is providing cheap loans to banks, under the Funding for Lending Scheme, on the condition that the banks do not reduce credit provision to British households and businesses.

And the FSA is trying to reinforce the impact of all of this by saying that there will be no incremental capital charge on banks that make net new loans to the British economy.

Will it work? It is too early to say - and latest data continues to show that money is tight for businesses.

There are two reasons to be cautious: first, it may well be that banks reluctance to lend is mostly to do with the attached risks, and not the interest or capital costs of making the loans; second, banks have a well-documented history of cynically manipulating the rules attached to schemes such as Funding for Lending, by (for example) increasing the categories of loan nominally favoured by the authorities while simultaneously cutting back on other categories of lending - which can result in unforeseen negative consequences.

All of which is to say that it is certainly too early for the board of Royal Bank of Scotland to be wholly confident that it is on a smooth glide path over the next two to five years to privatisation.

If credit provision remains anaemic, if this recession were to look like a three-humped camel with a further dip in the new year, then voices both within the coalition and without would start clamouring for RBS to become a more explicit instrument of the state - such that RBS would be mandated to increase its tolerance of the risk of lending to wealth-creating businesses.

PS The prime minister has today thrown his weight behind an initiative that began in Cable's Business Department, to accelerate small business's access to the money they are owed by their big-company customers.

In Downing Street today, he is gathering together more than 40 of the UK's biggest businesses, to persuade them to provide administrative help to their small suppliers such that their these suppliers can raise cheap short-term loans from banks against the security of approved invoices.

Here's how to think about this: if small businesses are owed money by a huge company like Tesco, their banks know that Tesco is good for the money; so the banks would provide cheap loans to those businesses, so long as Tesco has a system for authenticating what it owes these businesses.

In theory, say officials, supply-chain finance of this sort could accelerate small businesses access to £20bn of cash - and could reduce these businesses reliance on more expensive bank funding.

But, to be clear, this would be useful a one-time boost to the cash flow of businesses, rather than a self-reinforcing dynamic process of increasing the supply of credit (see my post How business can bypass banks for more on this).

David Cameron is trying to set an example, by implementing the scheme in relation to what the state buys from small pharmacies - which apparently could free £800m for these pharmacies.


A former banker who is advising David Cameron on his supply-chain-finance initiative has rung to tell me I have understated its potential benefits.

He believes the effects will be more dynamic, less of a one-off, than I suggest, by cutting the cost of finance for small companies and releasing incremental credit not currently available from traditional invoice-discounting and factoring schemes.

I presume we all hope he is right.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • Comment number 173.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 172.

    We once had a well regulated banking system, a system that was more stable not least because there were so many mutuals (building socities - remember them?).....but greed got the better of us collectively.

    We kept voting for parties that said they were deregulate the banks, we kept voting for Building Socities to be demutualised because we got a few grand each time......

  • rate this

    Comment number 171.

    1) Merv has a go at banks saying it's the worst possible option
    2) Then he props up the failed banks by pumping £375,000,000,000 onto their balance so they can pretend they are solvent.
    3) The Govt asks them to lend to businesses
    4) The banks are so insolvent they can't lend a tiny fraction of that
    5) Viable businesses go under for lack of cashflow
    6) BoE does more QE

    It's all about the banks.

  • rate this

    Comment number 170.


    Agree about local banks (Spanish example maybe not good though). That can be achieved easily by a big break up. Reduce the size, reduce the risk per bank!

  • rate this

    Comment number 169.

    For years there have been concerns over the amount of private debt there is in the UK. If the public are reducing this debt it is for the good for the economy as it will give people more of their income to spend, rather than pay of debt with the added cost of interest. I know the financial industry will not like this as it is where they make much of their income, but it is for the public good.

  • rate this

    Comment number 168.

    GO & DC will be toast if the economy dips back into negative territory next year, as the chances of green shoots, less still a "feel good factor" returning before 2015 will be as good as zero.

    Small & medium enterprises need a new form of bank finance; capital equity, not transaction & bonus driven short term credit.

    A real capital culture conversion & change is needed in UK banking & finance.

  • rate this

    Comment number 167.

    #165 Up2snuff - without even thinking about it, there is a bubble waiting to burst with the housing part (rent) of the housing market. The associations are in huddle at this very moment discussing the future, use of final allocations, brown land, and their career paths. It's clever stuff. They have worries.

    What we need to do, in London certainly, is simply demolish one borough and redevelop it.

  • rate this

    Comment number 166.


    A couple with two kids need £36,800 a year for an acceptable standard of living. Rowntree Foundation's minimum income study suggests families must earn a third more than in 2008, to live within social norms.

    It is thus straight forward to formulate our economic equation.

    π√GDP :-)

    (Population/4) into GDP brings a potential to borrow from RBS, and take the dog for a walk

  • rate this

    Comment number 165.

    re#97 JP
    GO is obviously not thinking too hard about things. Hopefully Lord Jenkin's intervention today will wake him up a bit. The media are repeatedly stating that 'Council Tax Benefit increased by xxx% under Labour'.

    GO needs to ask & answer 1. Why was that, 2. Was there more than one cause, and 3. What might happen if I try to get £10bn for the Treasury by cutting CT Benefit?

  • rate this

    Comment number 164.

    Robert, I wish you picked some more relevant stories today that will slip under the radar with all this Jimmy Saville saint-devil story.


    the "beneficial" High Frequency Trading


    Tobin Tax not abandoned

  • rate this

    Comment number 163.

    #152 not all bank in CITY are UK so have no interest in UK.
    even the UK banks have NO interest.
    there need to be local banks well regulated without politcal control like Spain.

    #161 in short we need to get back to Built in Britian without the BL chaos.

    Again this a long haul , not done in a 5year parliament yet we have not even started.

    BBC blogs limit are useless

  • rate this

    Comment number 162.

    Us regulation starting Jan, EU regulation starting in July. Repatriation of funds to the US. The latest incarnations of EU construction, rescue packages for Greece... ?, Spain, Italy, Nosediving imports to EU, a German election, EC debating broadening and integration, ET is due a return, Poland is getting fidgety, it all actually needs to stand still, and deleverage now.

  • rate this

    Comment number 161.


    A business MUST be profitable or it fails. Borrowing money is NOT a solution to lack of profits.

    The ONLY valid reason to borrow is to be able to repay the loan and make even more money from the business that is generated.

    Borrowing for property speculation and bubble inflation is NOT a valid reason to borrow.

    Unless we revert to a solid understanding of the fundamentals we will fail.

  • rate this

    Comment number 160.

    #157 - Lending dries up, property is devalued. That scandal cost taxpayers for yesrs to come and is now a dog chasing its tail.

    Next year is financial turmoil from day 1 - new regulation galore, and serious problems with the €urope now being constructed. The design is basically a financial model born out of crisis to implement enduring law which is designed to protect institutions - banks.

  • rate this

    Comment number 159.

    We have to accept that the whole 'system' is irredeemably corrupt and not fit for purpose.

    The incompetents at the BoE/FSA/SEC & Fed just haven't a clue what they did wrong. Even telling them in simple words will not work as their education prevents understanding.

    Sack the lot.

    For capitalism to work money(capital) has to have a real use cost. This is the core of the error. Till it is fixed!

  • rate this

    Comment number 158.

    @152 Comrade
    Ones that are multi-nats not necessarily bringing back profits to UK (for tax or invest/ forget, theyre being forced to incr capital ratios so need to reserve as well as lend. See my #74

    Aspects of business may be quiet for them, M&A, factor/leasing, trading, etc.,& they may be having a thin time.

    Aussies have right idea, their banks are brimming with cash!

  • rate this

    Comment number 157.

    re#148 purple
    Doesn't work like that if Lender does sums right. Lender has securitised mortgage - Borrower pays mortgage - both benefit. One has house, other has cashflow+profit. If market fails, for securitisation, doesn't matter - deal has been done in past.

    Fly in ointment: Gov makes changes, Borrower loses job. What then?

  • rate this

    Comment number 156.


    But is the FED not buying back 60%+ of what its issuing?

    The $ is dead is it not, the BRICKS , Russia, & Soros KNOW THIS!

    Its final death march began on sept 13 with (QE infinity) as4 its value up2 that point well, we can go back2 1971(coming off the gold standard)2C the beginning of its moden demise

    We appear 2b in a currency war &as4 capital/IST well, we live in a debt based sytem

  • rate this

    Comment number 155.

    What are RBS doing for my personal well being. Lend me oodles of squids l have no hope of repaying ever. Ahem, lovely

    We idn't borrow £6.8bn, apparently.

    One reason things go well at the moment -

  • rate this

    Comment number 154.

    Share indexes have fallen on both sides of the Atlantic after weak results from two large US companies, and more bad news for the Spanish economy. Hong Kong has moved to weaken its currency for the first time in three years as demand from investors fleeing Western markets has caused a sharp increase in its value.

    Investors fleeing western markets, game over Cameron, you've been caught lying.


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