SME Business News

Economic rescue efforts - including quantitative easing - will not work until the fundamental problem that Britain’s banks have become “unfit for purpose” is addressed, says nef (the new economics foundation).

The report just published calls for a radical rethink of Government strategy, to rebuild a financial sector that is clearly fit for purpose.

According to nef, instead of throwing good money after bad, Government should:

de-merge the big banks
separate retail banking from corporate finance and securities dealing
support community finance initiatives and small businesses, who will be the drivers of the recovery. Small businesses provided 59% of private sector jobs in the UK in 2007.2
IOUK: banking failure and how to build a fit financial sector, analyses the behaviour of the UK banking sector. Banks have withdrawn from the heart of communities, sidelined their basic business, lost touch with the real needs of their customers and become structurally unable to serve them, it says.  While flooding the economy with inappropriate credit they contributed to a financial drought in disadvantaged areas and starved small businesses of the credit they needed to survive.

The report goes further to say what we all feared, that the Government’s rescue attempts have so far failed. Despite virtual nationalisation and a £37bn bailout of the biggest banks, the Government seems powerless to force banks to lend appropriately. The Enterprise Finance Guarantee scheme which replaced the Small Firms Guarantee Scheme has failed to kickstart lending (despite Lord Mandelson’s claims in an announcement slipped out quietly on 20 February in response to media criticism) and is weighted in favour of larger firms.

“The Bank of England has reached a dead end with interest rate cuts and the decision to flood the economy with £75 billion of new money through “quantative easing”; is just another form of bail out. The Government is in denial if it thinks we can go back to business as usual; that’s what caused the crisis. If banks became too big to let fail, how can the answer be to make even fewer banks even bigger and keep channelling all the funds through them? We need to bring banks back to their original function, break them up and return them to a scale where they are in touch with the communities, people and businesses they should have been serving all along.” said Sargon Nissan, Business and Finance Researcher at nef and co-author of the report.

Yet again we are reading that the banks are out of touch. Right now, there are two choices for the hard pressed SME. Conduct intensive due diligence to find a bank with whom they can have a relationship beyond an anonymous call centre or seek funding from the independent sector.