Chancellor George Osborne’s promise to further help small businesses through a programme of “credit easing”, in another attempt to free up bank capital for enterprises. The move is being read in some quarters as an acceptance that February’s ‘Project Merlin’ agreement with the banks has failed to deliver results.
Credit easing is likely to involve the securitisation of banks’ small business lending portfolios. Unlike larger companies, which issue bonds that can be sold on, loans to small- and medium-sized enterprises (SMEs) are not fungible. In order for the government to participate in the market, banks would probably package up loans into a financial instrument which would then be bought by the treasury, or by a special purpose vehicle. This would allow the government to carry some of the risk on lending, hopefully prompting banks to free up more capital.
“I think certainly the principle is very sound, it’s something that the United States dabbled in a bit over the last couple of years,” Andrew Goodwin, senior economic adviser to the Ernst and Young Item Club, said.
However, he cautioned: “It’s very much a theory and there isn’t much behind that to back up how it’s going to work at the moment. We’re giving it a cautious welcome, but we’re really waiting for the autumn statement when the Chancellor’s promised to give a bit more detail about how he’s going to implement it.”
In the US, the government introduced a scheme known as the Term Asset-Backed Securities Loan Facility, or TALF, which used this securitisation method.
“I think the banks will take advantage of this, and I don’t think that the money will end up in the small to medium sized businesses,” Ralph Silva, managing director at analysis firm SRN, said.
“What I believe will happen is that the banks will securitise or will create CDO-like products for the SME portfolio that they have, go off and sell it and then take the funds that they get from the government and put it in the safer area, which is of course the large businesses. I think that’s where the money’s going to end up, because it’s really, really difficult for the government to say it must go back into the SME world. I don’t see that happening.”
The treasury’s move is the latest in a number of initiatives to get banks to lend to SMEs. In February, the four largest UK banks - HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group - along with Santander, agreed a deal with the government to lend £190 billion to businesses in 2011, including £76 billion to small and medium-sized enterprises. This was supposed to unblock the credit squeeze in the British economy and see small and medium-sized businesses get access to capital that was becoming concentrated at the top end of the market. Figures from the first six months of the project showed that while lending to the sector had increased, it did not meet the targets laid down in the agreement.
The announcement of a fresh programme has prompted speculation that Osborne’s speech is a tacit acceptance that Merlin has failed to deliver.
“It is and it isn’t,” Goodwin said. “Merlin gives you overall lending levels, but the experience on the ground has been that lending to big companies has been fairly good, but lending to small companies has been restricted. I think this is really taking it on another step.”
The British Bankers Association (BBA) says that although the absolute number of small businesses unsuccessfully trying to obtain finance is large, they represent a minority of the space, and that the financing gap is often overstated. Those which do get turned down often do so simply because they have little or no experience of dealing with banks, and lack formal finance skills. A spokesperson from the BBA said that the organisation is working with its members and SMEs to build a network of 1,000 “mentors” to help address this need.
Silva agreed, saying that based on his analysis, banks are not being overly reticent in lending to the SME sector. Rather, he said, they are lending at full capacity to credit-worthy businesses. To build more risk into the system would only undermine the long-term strength of the economy.
“It’s really wrong to put more money into the SME world if all we’re going to get is more bankruptcies later in the day than right now,” he said.