Cable looks to boost lending by banks
26th July 2010
Source: BBC
Banks are set to come under renewed pressure from the government to increase lending to small firms.
Business Secretary Vince Cable says banks are "not acting in the national interest" and measures may be needed.
He has suggested dividends and bonuses could be a target as part of a "carrot and stick" approach to boost lending.
Mr Cable has unveiled a joint consultation paper with the Treasury containing options to improve cash flow to businesses.
Introducing the paper, Financing A Private Sector Recovery, Mr Cable said: "If we don't anticipate and tackle finance barriers now, we could face a big problem in the future.
"Left unchallenged, a lack of accessible finance for businesses could prevent the recovery accelerating."
Chancellor George Osborne said: "As the economy recovers, it is crucial to ensure that the supply of finance supports rather than constrains demand and business confidence."
Wider financing
The green paper includes proposals for a range of financing options, including encouraging venture capital and so-called business angels to invest more widely.
For example, it says the value of UK private equity deals in 2009 was 15% of its pre-crisis peak.
The paper also proposes encouraging businesses to use equity to raise cash.
It also outlines proposals for regional stock exchanges in cities such as Birmingham and Edinburgh, and more government loan guarantees under a National Loan Guarantee Scheme.
It also sets out proposals for increasing transparency in bank loan applications and increasing competition between banks and other financial institutions, as well as broadening the role of mutual lenders.
Banks could also be made to sign up to the same type of lending agreements placed on the part-nationalised RBS and Lloyds.
These include penalties on executive remuneration for failures to boost lending.
The deadline for responses to the green paper is 20 September.
No illusions
In a Sunday Times interview, Mr Cable said: "We are very worried about the behaviour of the banks."
He said: "The banks are not acting in the national interest. I don't think they get it.
"At the moment, we are talking to them in an amicable way and we are monitoring them, but if this doesn't work, there are combinations of carrots and sticks that can be employed and they are under no illusions about that - and we are not either."
Mr Cable added: "What we would question is whether banks should be paying out dividends and bonuses when that money could be used to... support small business lending. "
Aides to the business secretary later told the Press Association that compelling banks to sign up to loan agreements was a "last resort" .
Other options outlined by Mr Cable include proposals for regional stock exchanges in cities such as Birmingham and Edinburgh and more government loan guarantees.
The banking industry, meanwhile, maintains that lending to smaller firms is stable while it is rising among larger companies.
A spokesperson for the British Bankers' Association said High Street banks lent £6.8bn in June.
"Demand for lending is currently low as businesses are not keen to take on additional borrowing when the economic outcome is uncertain," it added.
City Minister Mark Hoban will also use a speech later to set out more details of the government's plans to reform the regulatory system, including the closure of the Financial Services Authority.
