There’s gold in them there hills – just not for bank deposit account customers
Would it make any difference if bankers were made to swear an oath when they entered the profession like doctors? ResPublica, an independent, non-partisan think tank, thinks it would. In a paper published this week, the authors argue that virtue needs to be at the heart of the banking system. “….virtue is not a vague euphemism for carrying on as before – it is a call for the re-introduction of purpose into banking as both an economic need and a moral necessity.”
At the same time, the Bank of England, in response to the Parliamentary Commission on Banking, has said that it will amend its Code of Conduct for City Pay to allow for bonuses to be clawed back up to seven years after they have been awarded and even if the cash has been received and spent. Fears have been expressed that high-earning bankers will go elsewhere and that this will be bad for London, but the Bank of England clearly thinks that trying to instill a more virtuous approach is impossible and a large stick is needed to force bankers to behave better.
Whilst all of this is interesting, the key issue is how do we get the banks to lend more to small and medium-sized businesses (SMEs) in the UK. Since 2008, lending to SMEs has fallen by over 25 per cent in the UK and loan rejection rates here are twice as high as in France and Germany. The SME Finance Monitor for the first quarter of 2014, which was published by BDRC Continental in May, stated that 48 per cent of SMEs in the UK were defined as permanent non-borrowers. This is not because this group does not want to borrow. It is because many of them either cannot borrow from the banks or have been turned down so many times that they dare not ask again.
When an economy recovers and activity increases, companies need more money to use as working capital. Lloyds Bank states in its “Visions & Values” section on its website that its core values are, “Putting customers first; Keeping it simple, Making a difference together”. RBS states in its “Our Values” section on its site that its core values are, “Serving customers, working together, doing the right thing, thinking long term.” By refusing to lend to SMEs, neither of these banks is upholding its own core values.
There is an alternative for SMEs. Crowdfunding is taking off in this country. According to the Financial Times, lending through crowdfunding sites could hit £1 billion this year. In the first half of the year, sites like Money&Co. lent £275 million to businesses and £243 million to individuals, so that suggests that the FT is right. However, this will only be achievable if individuals shift savings from low-yielding deposit accounts held with banks and building societies and lend to companies. Tonight there will be 1.4 trillion left in deposit accounts in the UK yielding virtually nothing. Money&Co. investors can expect to get a yield of 6 per cent on their money net of charges and allowing for bad debts.
The landscape is changing very rapidly. The banks continue to let us all down. New codes and trying to instill a more ethical approach will not help the companies that need money to grow today. Crowdfunding is the solution.