John Mulheron: “UK banks are using Funding for Lending subsidies for their own gain as UK economy stalls”

The competitor lock-out sees nine out of 10 business loans continue to be provided by the Big Four Banks. They have also recently been given further access to lending by the Bank of England, which has removed the ‘capital buffer’ handbrake by £5.7 billion, effectively freeing up around £150 billion of credit.

Net lending to SME’s and mid-caps remained flat at £0.5 billion in Q1 2016. So, it can be argued even the subsidised funding isn’t being accessed fully, worryingly at a time when UK businesses confidence is lower, output is stalling and our trade relationship with the EU is unclear.

Increase the flow of credit

Back in 2012, the government announced a Funding for Lending scheme (FFL), replacing the National Loan Guarantee Scheme, it was designed to increase the flow of credit to homeowners and UK businesses. The scheme was extended last year, bringing the total to around £60 billion made available to the banks, but rather than using FFL as it was meant, it is effectively subsidising rates, often to the strongest credits to keep rates artificially low and continue to squeeze out competitors.

Compounding this growing issue is a lack of policing and regulation from both the Financial Services Authority or the Competitions and Markets Authority. This creates both a future risk to UK business and unfair monopoly.

Following the near collapse of the global banking system several years ago, UK taxpayers had to bail out some banks. Whilst the 2013 Banking Reform Bill put in place structural ‘fire-wall’ changes to separate the high street from the trading floor, increased supervision from the Bank of England aimed to clamp down on the culture and conduct; however very little, if anything has changed.

Greater competition and choice was promised both for consumers and businesses, but once again regulators seem to turn a blind eye to the behaviour of the major UK banks. It’s a worryingly cosy relationship.

Barclays has gained the biggest advantage from the so-called Too-Big-to-Fail subsidy in the past year, benefiting by £11.7 billion, a rise of 17.6% over the previous year. RBS was close behind, gaining £11.5 billion, while Lloyds Banking Group’s share was £9.7 billion. HSBC gained £4.7 billion through the effective subsidy.

Staggering subsidies

According to Tony Greenham, the head of finance and business at the New Economics Foundation, these reforms do not go far enough.

Greenham said: “Each year big banks save billions of pounds because financial markets believe they are too big to fail. The size of these subsidies remains staggering, and suggests reforms have not gone far enough to tackle the problems in British banking. UK taxpayers are still on the hook for the big banks”.

The main problem is that the Big Four banks can access funding at significantly lower interest rates than their competitors. The lower rates they choose to offer are as a result of an implicit government subsidy.

CMF Capital, which specialises in providing asset based funding to UK mid-cap businesses is just one of many corporate funders along with the ‘Challenger Banks’ who are increasingly frustrated by the financial landscape.

These subsidies are unique. Even government attempts to encourage the banks to use FFL to increase lending and help take a more pragmatic view of portfolio risk has had little effect. In effect, all the banks have done is used the FFL and rate subsidies to shore up their own balance sheets, lock out competition for their key customers and boost profits.

Lure of cheap credit

Latest research from British Bankers Association (BBA), the trade association from the UK banking sector shows that in Q1 2016 loans and overdraft facilities we’re 18% down on the same quarter in 2015. With the number of SME’s holding cash increasing by 6%, this indicates that even with the lure of cheap credit, fewer are accessing it or not even prepared to have a conversation with their bank.

At CMF Capital we provide financial solutions that are tailored to the needs of a business. We spend time discussing their capital requirements, looking at their wider business strategy and really working to understand what type of funding solutions they need to unlock growth.

We’re highly compliant and look to build long term relationships with our clients – whereas banks are simply happy to dish out cheap credit without, in many cases, really looking at the implications of how that business is going to pay the money back. This approach helped create the last banking crisis and if it continues we could easily see another – especially with the uncertainty Brexit is bringing.

Only last month, long-awaited measures to break the market dominance of Britain’s biggest banks, were criticised as ‘weak’ by members of the finance industry and consumer groups as insufficient to boost competition and create a transparent and level playing field. Funnily enough, the BBA applauded the measures.

The Competition and Markets Authority’s (CMA) recommendations, following a near three-year, £5 million probe into commercial and retail banking, shied away from radical measures like breaking up lenders. Passing the buck, Alasdair Smith, a member of the CMA panel, said: “Radical changes like easing bank capital requirements to encourage wider competition were matters for regulators like the Bank of England”.

Surely it is reasonable to expect the FFL scheme to be used for the purpose for which it was designed and for the Authorities to ensure this happens. Increased competition is good for the industry and for customers. I cannot understand why this situation continues and is allowed to continue.

John Mulheron is managing director of CMF Capital www.cmfcapital.co.uk