Drop in bank lending threatens business growth

International accounting and consultancy network UHY reveals that European economies generally are among the worst affected by the slump in lending.

Private sector bank lending was $12.2 trillion in 2016 – down from $16.3 trillion in 2008.

By contrast, on average across all the 24 countries studied around the world, private sector bank lending increased by 24% over the same period in absolute terms.

UHY says that small businesses continue to be particularly affected by the ongoing bank lending slump.

This is partly due to regulators tightening banking rules in response to the financial crisis to increase the amount of capital that banks need to hold to cover their liabilities.

With less capital available to lend, banks tend to be more likely to focus on lending to larger businesses that they see as having better security and repayment prospects.

Smaller businesses are also more negatively impacted by the fall in bank lending as they may struggle to raise alternative sources of finance, often through a lack of awareness of other options, such as asset finance.

The UK is among the European countries particularly affected. In 2016, a total of £1.68 trillion ($2.29 trillion) was lent to businesses in the UK – down from £2.11 trillion ($2.87 trillion) in 2008.

Even in Germany, widely seen as the economic powerhouse of Europe, there was a 21% decrease.

UHY adds that countries including Ireland and Spain, which were hardest hit by the banking crisis, are seeing the slowest recovery in private sector credit, with lending down 69% and 51% respectively.

Laurence Sacker, managing partner at UHY Hacker Young, said: “As regulators have forced banks to shore up their balance sheets and reduce risk, many SMEs have found their access to lending severely curtailed.

“While some larger companies may have been able to get around this by accessing the bond market, smaller businesses are unlikely to have that option.

“Recent economic crises in some Eurozone countries and the prospect of Brexit also continue to hit lender confidence. Across Europe, this is making the road to recovery even more of an uphill journey, with even the strongest economies adversely affected.

“Without the capex they need to fund investment, businesses will struggle to capitalise on growth opportunities or drive innovation, ultimately risking losing ground to global competitors.”

The research showed that the G7 group of leading world economies is lagging behind in terms of lending, while BRIC economies power ahead.

On average, the G7 saw a 1% decrease in real terms since 2008, whereas Brazil, Russia, India and China enjoyed an average increase of 209%.

China topped the UHY table, with bank lending to the private sector jumping 270% between 2008 and 2016.

Sacker added: “It’s debateable whether the appetite to lend to BRICs and other emerging economies is sustainable, as debt levels increase while economic growth slows in countries like China. Scrutiny of companies’ ability to service their borrowing will be increasingly intense.

“What’s more, if interest rates – particularly in the US – were to rise that could put the brakes on lending to both developed and emerging economies, as companies think twice about taking on more expensive borrowing.”

UHY Hacker Young is a founder member of the UHY International network with offices in every major financial centre in the world.

Amount of bank lending to private sector (USD)

Bank lending to private sector as % of GDP