Bank Loan Scheme Is The Last Step Before Nationalisation?

| January 19, 2009 | 0 Comments

Today the UK government launched their last attempt to unfreeze the credit markets with a three pronged bank loan scheme:

  • Working Capital Scheme – cost £10bn – provides a 50% guarantee on £20 billion of short term loans to businesses with a turnover of less than £500m with banks having to register a portfolio of such loans through the BERR (Department for Business, Enterprise & Regulatory Reform). The BERR will charge a premium for the guarantee which will likely be passed on by the bank to the borrower
  • Enterprise Finance Guarantee Scheme – cost £1.3 billion – provides a 75% funding on a scheme for new 10 year loans of between £1,000 and £1,000,000 to small to medium size companies with turnover less than £25 million. High street banks provide the other 25% of funding
  • Capital for Enterprise Fund – cost £50 million – provides a 66.6% funding on a scheme where companies with up to £50 million turnover sell their debt for an equity stake of between £0.25 million and £2 million with the four main high street banks providing the 33.3% funding.

I guess the goal is to allow the banks to take another look at the loan requests that fell just outside their current strict lending criteria. With the guarantees in place the banks’ capital requirements are reduced and hence it can make more loans.

However, I can live with the first of these schemes but not the other two as I believe it is inadvisable for the government to put in more than a 50% guarantee or contribution. Any more than 50% really begins to prejudice the lending decision.

As typical with bureaucrats, we have three schemes with different entry criteria and qualifications and this will no doubt suffer from unintended consequences. [Please give me one rule that I can understand rather than three rules where I need a lawyer and an accountant to interpret them.]

Alternative Bank Loan Guarantee Scheme

I would propose a much simpler approach: one scheme rather than three.

  • Its goal would be to address those viable businesses needing affordable loans that have only now fallen just outside of the banks’ tighter lending policies.
  • a single scheme 
  • open to companies up to £100 million revenues 
  • loans up to £1 million 
  • 30% government guarantee 
  • total volume is £38 billion of loans. 
  • total scheme cost is the same being around £11.4 billion. 

With my approach less bad loans would be made as the banks would look harder at the lending decision and therefore we can expect less defaults, and less cost to the taxpayer.

Rationalisation for Nationalisation

If the bank loan scheme fails, then what is the next step? Nationalisation?

(Futher) nationalisation of the banks is an interesting prospect. The analysis goes

  • the banks lent too much – so we tightened their capital requirements
  • the banks cut their lending – and the credit crunch started
  • the banks are still not lending enough
  • we tried to persuade them to lend more – but that failed
  • we will nationalise them so we can lend more
  • In summary, the problem was ‘too much easy credit’, and the solution is ‘more easy credit’.

    In this scenario, we would definitely need a very light touch on the supply of credit as soon as we look like coming out of recession. Otherwise we will be looking at very serious inflation. It is bit like driving up a steep hill in an old car where you floor the gas pedal but need get the power off quickly just before you hit the summit. Nationalised industries are not known for being ‘quick on their feet’ and ‘having a light touch’ faced with a rapidly changing marketplace. We would half down the hill, in the red, with no control over the steering by the time a nationalised bank realised an adjustment was needed. In other words, a recipe for disaster.

    Nationalisation of the Banking System

    If you are going to nationalise banking this would be my recipe:

  • segregate retail and investment banking and only nationalise the retail piece
  • adopt a conservative lending regime
  • offer a vanilla banking service at a low cost (effectively free to customers in credit)
  • offer a personal pension service – index tracker – ultra low cost – which caters for 90% of the population
  • run the bank at a modest profit
  • have a customer charter than respected the citizen’s rights
  • And if I was feeling a bit like ‘Big Brother’:

  • only allow benefit/welfare entitlements to be paid to this account – we could then lose the national identity card scheme
  • deliver tax allowances through the account
  • Maybe it is just as well I am not in power.


    Category: Banking

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