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Tom Devonshire

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Banks: Are They Fuelling the Fire of the Recession?

Posted: 27/09/11 01:00

Four years on from the collapse of Northern Rock and start of the credit crunch and small businesses are still finding it difficult to secure any sort of finance.

When the coalition government came into power, Vince Cable lauded the importance of small businesses for the UK to fight its way out of recession. The rhetoric is sound, small businesses (businesses that employ less than 250 people) of which there are four million of collectively account to over half of the UK's GDP. It is a lot easier for a business employing 10 people to double in size than a FTSE 100 company to double.

In attempt to stimulate small business growth as part of the bank bailouts apparent pressure was applied to the banks to increase the lending and credit facilities of SMEs. However, most businesses have found any sort of finance very difficult to get a hold of, the funding that is available is often very expensive despite Bank of England interest rates remaining at 0.5% since March 2009.

Back in February the government agreed terms with the leading four banks (HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group) covering lending, bonuses and transparency. Code named Project Merlin, the banks agreed to lend £76bn to small businesses in 2011 - an increase of £10bn on lending in 2010. However, since the project began lending has continued to be slow, in July banks were more than £2bn down on their targets.

A recent survey by financial specialists Syscap found only 8% of SMEs believe their ability to secure a bank loan in the last year have improved. The UK now finds itself in a position where we, the tax payer, have bailed out the banks when years of poor business practises all came back to haunt them (which sparked the biggest recession since the Great Depression of the 1930s) but now the banks have their house in order they are refusing to do their bit for the economy.

We are in a never ending cycle unless the banks start lending and stimulating growth. Currently, the banks are hiding behind the slowing of consumer demand as a reason why they are falling behind their Project Merlin targets. Consumer demand will remain low unless job security and credit facilities increase.

The Bank of England is now considering Quantative Easing to try and feed the banks the money to lend out, this is all well and good but will the banks do this? They have the money now and are just sitting on it! It all comes back to the banks, the banks have the money to fight us out of this crisis but until the government gets tough, we will remain in this mess.