Myth Of The Week: Banks lend to (small) businesses

Uncle Vince has proposed doing something or other which is not popular with the banks, so the banks have promptly hit back with the usual crapola, for example:

Stuart Fraser, a former stockbroker and head of the City of London Corporation, said: "It is vital we reconcile political imperatives with what is practical for banks. There is only a finite amount of capital available (1), and if banks have to stump up more, they shouldn't be rushed."...

CBI chief John Cridland said on Tuesday: "Taking action at this moment, which weakens the ability of banks to provide the finance businesses need to grow, (2) is barking mad."...

But Cable was taken to task by financial services lobby group TheCityUK, which said: "A rush to implementation risks weakening the UK's economic recovery if it weakens the lending capacity needed in the market."

1) He's an idiot. Loans create deposits and not the other way round. if people want to borrow and look like a good risk, the bank just lends them the money, they spend it on something else and the recipient of the funds deposits them back in the banking system.

2) Taking RBS' financial statements as an example, their balance sheet shows total loans and advances to customers of £555 billion, of which £115 billion is loans to 'corporates'. Let's times those figures by four as a reasonable estimate of the overall UK picture, gives us total lending to businesses of £460 billion.

Out of that £460 billion, just under £300 billion is secured on commercial land and buildings (so it's not really lending to businesses at all, it's lending to owners of commercial land and buildings) which leaves us £160 billion, some of which may well be nominally to 'small businesses' but experience tells us that the bulk of this is secured on the homes belonging to directors or shareholders, so that's not really lending to small business either, that's a second mortgage which the borrower invests in his business.

We could continue slicing away like this, but what it boils down to is that only a few per cent of total bank lending is really lending to small businesses. To be fair, why should they - It's complicated and risky - but that's another topic.
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UPDATE: I spotted this in the Evening Standard on the way home:

"The Federation of Small Businesses also demanded that reform be implemented soon, dismissing fears that ring-fencing retail banks from their riskier investment arms will hit profits and force them to cut lending.

Andrew Cave, FSB director of external affairs, said: "Since 2008, we've been dealing with the consequences of doing nothing. It's extraordinary that it has been suggested that these important and timely reforms are being put back even further. We think ring-fencing the banks is essential not only to make it safer but also to create a behavioural shift - so that the banks change their behaviour to small businesses. Only 5% of lending is to corporates."