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Bank lending is big problem for small firms

Logic of Sir John Vickers’ proposals could be bank nationalisation

One of George Osborne’s (numerous) problems is a lack of bank lending to small companies. While many large and medium-sized firms are sitting on piles of cash, (too scared to invest while a recession looms), small firms are struggling to get an overdraft or life-saving loan.

A lack of lending will be one of the underlying themes of Monday’s Banking Commission report. What will Sir John Vickers’ plan for ring-fencing bank retail operations cost in extra capital? Bigger rainy day reserves, according to the bankers, means less money for lending.

If we accept banks are not like other businesses and can’t cut costs to meet new obligations, (although ending the bonus culture and cutting dividends are two possible savings measures) then all plans for banks to hold more capital are going to raise the cost of lending.

The banks say the answer is to ease off on reforms that demand extra capital. But the logic of the government’s position is not to keep loading banks with extra capital and watch them curtail lending, but to endorse a clean split and eradicate the need for extra capital through nationalisation.

A government guarantee would allow the retail operations to lend without the taxpayer being on the hook for casino-style betting by the investment arms. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds