Cable looks to boost lending by banks

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Media captionRobert Peston talks to Vince Cable about his banking reform plans

Banks are set to come under renewed pressure from the government to increase lending to small firms.

Business Secretary Vince Cable said banks had to lend to "good British companies" and measures may be needed.

He has suggested dividends and bonuses could be a target as part of a "carrot and stick" approach to boost lending.

Mr Cable has unveiled a joint consultation paper with the Treasury containing options to improve cash flow to businesses.

Introducing the paper, Financing A Private Sector Recovery, Mr Cable said: "If we don't anticipate and tackle finance barriers now, we could face a big problem in the future.

"Left unchallenged, a lack of accessible finance for businesses could prevent the recovery accelerating."

Chancellor George Osborne said: "As the economy recovers, it is crucial to ensure that the supply of finance supports rather than constrains demand and business confidence."

Wider financing

The paper includes proposals for a range of financing options, including encouraging venture capital and so-called business angels to invest more widely.

For example, it says the value of UK private equity deals in 2009 was 15% of its pre-crisis peak.

The paper also proposes encouraging businesses to use equity to raise cash.

It also outlines proposals for regional stock exchanges in cities such as Birmingham and Edinburgh, and more government loan guarantees under a National Loan Guarantee Scheme.

It also sets out proposals for increasing transparency in bank loan applications and increasing competition between banks and other financial institutions, as well as broadening the role of mutual lenders.

Banks could also be made to sign up to the same type of lending agreements placed on the part-nationalised Royal Bank of Scotland and Lloyds Banking Group.

These include penalties on executive remuneration for failures to boost lending.

The deadline for responses to the proposals is 20 September.

'Potential sanctions'

In a BBC interview, Mr Cable said: "In terms of what could be done to change their behaviour, there is a combination of sticks and carrots.

"The carrots include more guarantees and different kinds of guarantees. The sticks could include strengthening, widening the agreements we've already got."

He said the Banking Commission could look at breaking up banks to create more banks and increase competition.

"Or it could involve taxation of gross profits, something the chancellor's already trailed, but if the banks insist on paying out large sums in dividends and bonuses rather than using that as a base of lending to good British companies, then that would be one of the potential sanctions open to us."


Mr Cable said he recognised that there were serious constraints on banks, in terms of being required to hold more capital.

But he said there was a "very serious problem" with bank lending and that the private sector had to grow and recover.

"We can already see the evidence that finances are constrained and we don't want that to stop the recovery happening."

The national chairman of the Federation of Small Businesses (FSB), John Walker, said a start could be made by insisting all banks should "refrain from applying high charges and stringent conditions to otherwise reasonable requests for small amounts of money".

And the FSB said that businesses had struggled to get access to fairly-priced credit, with banks imposing punitive interest rates and conditions.

'Low demand'

However, the banking industry maintains that lending to smaller firms is stable while it is rising among larger companies.

A spokesperson for the British Bankers' Association said High Street banks lent £6.8bn in June.

"Demand for lending is currently low as businesses are not keen to take on additional borrowing when the economic outcome is uncertain," it added.

City Minister Mark Hoban will use a speech later to set out more details of the government's plans to reform the regulatory system, including the closure of the Financial Services Authority.

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