Pressure on banks to accelerate small business lending
The Bank of England will confirm tomorrow what has been reported almost everywhere (but here, sorry) - which is that the UK's five largest banks are collectively a little bit behind track to meet the promise they gave to the government in Project Merlin to make available £76bn of credit to small and medium size businesses (or SMEs) this year.
In the first three months of the year, the banks lent £16.8bn to small businesses - compared with the £19bn that can be seen as in effect the target for the period. That's a short fall of 12%.
On business lending as a whole, including SME lending, the banks have done better. They have lent £47.2bn, compared with a de facto target of £47.5bn.
Even though ministers regard it as vital to the UK's economic recovery that the banks provide adequate finance to small business, the government won't (and can't) punish the banks at this juncture, because the official lending targets are for lending over the course of the full year not in the quarter.
"We're a bit disappointed with the figures for lending to small business," said a senior member of the government. "Plainly we would expect the banks to do a bit better as the year goes on".
Under Project Merlin, the Chancellor, George Osborne, and the Business Secretary, Vince Cable, made some woolly commitments to be less hostile in their relationship with the banks, so long as the banks provide "the appropriate capital and resources to support gross new lending to UK businesses...of £190 billion".
Of this £190bn, £76bn was pledged for the economically vital small business sector, up from £66bn last year.
Senior ministers, including the prime minister, have been saying in recent days that if the banks don't meet their lending targets, they reserve the right to increase taxes on the banks or take action to curb bonuses.
But right now the government is cutting the banks some slack, partly because Project Merlin was not signed until February 9, so for the first 40 days of the quarter the banks were not subject to the agreement and were able to lend as much or as little as they chose.
I expect the Treasury to issue a statement tomorrow telling the banks they must try a bit harder, if they want the government to honour its side of the Project Merlin bargain.
So why is SME lending a bit behind the schedule outlined in Project Merlin?
Well, the banks insist - as they have done since the banking crisis of 2007-8 - that they are providing adequate finance to small businesses, but that demand for credit is subdued.
In its results for the first three months of the year, Royal Bank of Scotland - which has by far the largest share of the small-business banking market in the UK - said that demand for loans from SMEs was "muted." It provided £6.7 billion of gross new facilities in that period, which represented a fall of 7% from the fourth quarter of 2010.
RBS, which is 83% owned by taxpayers, estimates that it provided a staggering 46% of all lending to SMEs last year, which is way above its 30% share of small business current accounts.
"Last year we lent considerably more than our natural market share to the tiddlers" said an RBS executive. "We can't be expected to lend as much as that in perpetuity".
So although RBS is continuing to provide 40% of all SME lending this year, it believes that the banks as a group will only meet the £76bn target if its rivals accelerate their SME lending.
As for small businesses themselves, many of them complain that banks are turning down credit-worthy proposals or are charging too much for finance. The allegation is that banks have become both too risk averse and too greedy.
The Bank of England has shown itself sympathetic to some of the criticism of the banks from small businesses.
The five signatories to the lending agreement are RBS, Lloyds, Barclays, HSBC and Santander. According to the Office of Fair Trading, the respective market shares in SME banking services of RBS, Lloyds, Barclays and HSBC are respectively 30%, 21%, 18% and 15% (RBS share will drop to 24%, following the completion of the sale of branches to Santander).
Santander has pre-emptively disclosed that it is ahead of its own plans to lend £4bn to SMEs this year (its competitors would say it is easier for Santander to meet its commitment, since the UK arm of the giant Spanish bank starts with by far the smallest share of this market).
One point of tension that has arisen between ministers and banks over Project Merlin is that ministers expect £76bn to be lent to small businesses, whereas the banks insist that the deal obliges them to make the £76bn available - and they can't be criticised if small business choose not to borrow all that.
A member of the government said: "We are absolutely clear that this is a promise from the banks to lend the money".
Update 09:45, Monday 23 May: Here is the explanation of the UK's five biggest banks for why they are running a bit behind target on lending to small businesses:
"The available (lending) capacity was not fully taken up due to muted demand. While in line with expectations, SME lending demand reflects the relatively slow growth in demand for goods and services in the economy as a whole at present.
"The April CBI survey of SME expansion intention highlighted this issue, with 69% of SMEs citing order levels as their number one concern. Only 8% of SMEs cited finance as a concern, reflecting the efforts that the banks have made in honouring their Merlin commitments and in raising business confidence as to the availability of finance once economic demand recovers."
All that may be so. But what is striking to me is that if the banks fail to hit the target for the year as a whole, members of the government say that they will not accept that the demand for loans from small business wasn't there.
Minsters want the banks not only to take this particular horse to water, but they expect the banks to force the horse to drink, whether he is thirsty or not.