The Government’s small business loan guarantee scheme is too small to boost lending and risks repeating mistakes made in the years before the financial crisis, according to the Institute of Economic Affairs.
The move is designed to make it easier and cheaper for banks to obtain credit on the wholesale markets. Banks will have to pass on 1 per cent of the savings resulting from the state backing to firms borrowing money. Any other savings made by the bank will go back to the Government to meet European state aid rules, with the minimum return set at 1 per cent.
IEA editorial director Professor Philip Booth says the scheme is “ridden with contradictions”. He says if it remains at its current size it will not increase lending but if it is expanded it will “hugely increase” risks in the banking system.
He says: “The Government is currently raising the cost of banking by imposing onerous capital requirements and structural changes on banks to ensure that they are less likely to receive government bailouts in the future. At the same time the Government is subsidising banks’ loans to small businesses using a method that is unlikely to increase the volume of small business lending.”
“One of the major causes of the financial crash was the US government underwriting mortgage borrowing. This Government is repeating that mistake with small business borrowing. By subsidising one particular approach to lending – that is lending financed through wholesale markets – the Government is also subsidising a specific model of banking which is the very model that failed Northern Rock.”
The National Loan Guarantee Scheme does not guarantee individual loans so banks retain the credit risk, though the Government will be liable if the banks involved fail.
TUC general secretary Brendon Barber says: “Any move to encourage the banks to start lending again is to be welcomed. Small firms are crying out for cash so they can invest, begin to expand and take on more staff.
“But this scheme on its own is not enough to get the UK economy back on its feet. With corporate Britain sitting on a £700bn cash pile, ministers must be more ambitious at finding ways of boosting business confidence and encouraging firms to unlock their profits to invest.”