How the banks hope to help small businesses

BBC business editor Robert Peston on new proposals from the banks' Business Finance Taskforce

Credit where it's due. Britain's biggest banks appear to have made a serious effort to respond to the concerns that they are not providing enough financial support to small and medium size businesses.

The report of their Business Finance Taskforce, which will be published later today after bank bosses meet ministers to discuss their proposals, contains recommendations of substance, to improve the flow of credit and capital to the private sector, and also to provide a bit more confidence to smaller businesses that they have a right of reply and appeal if they feel mistreated by their respective lenders.

The proposals fall into three broad categories:

1) Initiatives to improve relationships with customers, which will include the provision of support for a network of business mentors, the establishment of a more independent and robust appeals process for businesses that feel poorly treated, and the creation of a new longer timetable for replacing existing credit;

2) New and improved sources of finance, including the creation of a new Business Growth Fund and help for mid-sized businesses to raise money on syndicated debt markets;

3) The collection of better business-lending data and the publication of clear information on what finance is available.

It's the Business Growth Fund which is the most eye-catching proposal. This will be a brand new institution which aims to make equity investments in businesses with a turnover between £10m and £100m.

The fund is a response to the concern - which feels almost as old as capitalism itself - that the UK lacks appropriate institutions to provide risk capital to smaller (though not micro) businesses.

For as long as I can remember, politicians and business folk have agonised that the UK is at a significant economic disadvantage compared to Germany, because we have no equivalent of Germany's Landesbanken, the banks that provide longer term finance to small and medium size businesses.

And since these are the businesses that generate so much employment and wealth, it is a financing gap that is more urgent than ever to fill in Britain, given the looming squeeze on public expenditure and the expectation that the years of boom for the UK financial services sector are well and truly over.

The banks are pretty ambitious for their Business Growth Fund. They hope it will make something like £1.5bn of investments over a number of years, from a series of regional offices (as well as an HQ).

That can be seen as a serious commitment to help businesses with growth potential, in that those companies that take advantage of the new capital on offer should also be able to lever in additional debt finance.

The fund will take stakes in businesses of at least 10% and will hold them for about five years. The aim is to appoint a chairman by the end of the year and start assessing investments as early as next spring.

Interestingly the leading banks behind the report - HSBC, Barclays, Santander, Lloyds, Standard Chartered, Royal Bank of Scotland - will invite other financial institutions to invest in the fund, alongside them.

As a minister said to me last night, "I think we have had some kind of return for kicking the banks; this new fund looks as though it will play a useful role".

Does it mean that there'll be an easing of pressure on the banks from the Chancellor, George Osborne, and the Business Secretary, Vince Cable, for them to do more to help business?

I don't think so, because there is still a gap between ministers and banks on the nature of the problem as it affects the smallest businesses.

The taskforce's report sticks to the banks' line that they are providing enough credit facilities to small businesses - and that the problem is that unconfident businesses simply don't want to borrow right now, with the economic recovery not yet firmly entrenched.

By contrast, senior ministers believe that businesses are put off from requesting credit by their perception - which may or may not be accurate - that banks will charge them too much.

Against that backdrop, for me, the most striking admission in the report by the banks is that they may yet become seriously constrained in the amount of vital credit they'll be able to provide as demand picks up.

That's because, as you won't need telling, our banks became far too dependent in the boom years on raising finance in asset-backed bond markets which still haven't recovered properly.

As readers of this blog will know, just to maintain their current stock of lending, Britain's banks will have to refinance some £800bn of term funding and liquid assets between now and the end of 2012 - including the need to find not far off £300bn to replace the state-backed finance they received from the Bank of England's Special Liquidity Scheme and the Treasury's Credit Guarantee Scheme.

The taskforce report makes some suggestions about how to change regulations relating to asset-backed securities that they feel would help ease this looming funding squeeze. But there remains a serious risk that we'll soon be hit by Credit Crunch 2.

Perhaps for reasons of pride, the banks are not holding out a begging bowl - the report studiously avoids asking the government for an extension of the loans and guarantees they've received from taxpayers.

But the Treasury is painfully aware that if asset-backed bond markets don't perk up a good deal more in the coming few months, it will have to keep the banks on financial life support for a good deal longer than it would want.

Update 1155: It is important not to get too carried away with excitement about the potential of the banks' new Business Growth Fund.

I calculate that it will be able to provide risk capital to around 250 middling companies over a number of years (based on the banks' assertion that they'll provide £1.5bn of equity finance in individual lumps of between £2m and £10m).

As I've said, that will be seen as a useful contribution to the growth potential of a segment of the economy that has typically found it hard to raise capital. But it won't be transformative.‬‪

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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