Beyond the Banks: How credit easing could change the lending landscape for British business

25/11/11

A new report published today argues that a new British Industry and Enterprise Bond can get credit flowing to small businesses and unlock future economic growth.

Beyond the Banks, published today, is the second report by NESTA and Sam Gyimah MP. It calls on the Chancellor of the Exchequer to set up the new bond in Tuesday's  Autumn Statement as part of a package of measures to unlock finance for small businesses and increase the diversity, quality and resilience of the UK's business lending sector.

The main recommendations laid out in the report are:

In the short term the Government should establish an investment vehicle to buy small and medium business debt from banks and other financial institutions

In the next three months, the Treasury should establish an investment vehicle to buy portfolios of business loans from banks. In the short term this will free up banks' balance sheets and allow them to lend. These portfolios of business loans can be bundled into bonds. These "British Industry and Enterprise Bonds" can then be sold on to other investors. In the first instance, they can be purchased by the Bank of England if, as expected, it begins another round of quantitative easing.

This plan will bring new sources of finance into the market.

NESTA's research shows that these 'British Industry and Enterprise Bonds' are of great interest both to savers looking for decent returns in a time of low interest rates and disappointing share prices. Our research shows that 70% of retail and institutional investors would be "very interested" or "fairly interested" in investing in these bonds.

In the longer term the Government should commit to increasing competition in the lending market - levelling the playing field for the new competitors.

Financial regulations should be changed to increase the diversity of finance available to SMEs - at the moment, start-ups like peer-to-peer financiers Funding Circle and Crowdcube face a regulatory minefield that is tough for them to negotiate, and cannot benefit from the support that government gives to other start-ups. The Government should level the playing field for new entrants.

The reason these measure are necessary is that the UK's lending market faces not just a short term problem of lack of lending, but a longer term problem of lack of competition: compared to business in other countries (EU, US), UK companies are dependent on a relatively small number of banks for debt finance. The scarcity of alternatives to bank finance and the concentration of the banking sector itself compromises the deal businesses receive and increases the fragility of the financial system.

NESTA's Executive Director of Policy and Research Stian Westlake says: "Economic recovery and growth relies on investment in UK businesses. But this continues to be held back by levels of bank lending. These have been persistently low since 2008 and are likely to fall further as the Eurozone crisis deepens. Providing access to new pools of capital is the long-term solution we need to unlock credit to Britain's small businesses."

Sam Gyimah MP, says:  "The economic crisis and the concentration and lack of competition in the UK banking sector means that without radical action lending to SMEs will continue to decline and stifle growth.  Unlocking new pools of capital for investment in British industry can reshape the lending landscape and have the transformational effect on our economy that the privatisations of the 1980s had. "

David Kern, Chief Economist of the British Chambers of Commerce, said, ""The plan to securitise small business loans can make an important contribution towards  improving the flow of credit to a major sector of the UK economy, and one that plays a key role in job creation. The effectiveness of such a scheme would be greatly enhanced if a significant proportion of the new money created by the MPC through quantitative easing was used to buy the resulting bonds. In the present difficult circumstances, it is important that this idea should become a key component of a comprehensive credit easing initiative. The recommendation that banks retain responsibility for managing the securitised loans, and for mintaining regular contact with the borrower, will play an important role in maintaining businesses' confidence in the proposals."

Xavier Rolet, Chief Executive of the London Stock Exchange (which runs the ORB, the UK's largest retail bond market), said, "The report hits the nail on the head when it says that early stage ventures are best financed with equity. In parallel, he also highlights how a retail bond market for high street savers  has real potential for funding companies of all sizes, medium sized businesses included.  The London Stock Exchange Group believes that a market like ORB can unlock a new, much needed form of finance, available through good times and bad times, and critical during periods when bank lending dries up."

-Ends-

For further information and interview requests, please contact Rachel Grant on 020 7438 2600/ Rachel.grant@nesta.org.uk, Helen Baimbridge on 020 7438 2615/helen.baimbridge@nesta.org.uk or Guy Bilgorri on 020 7438 2611/guy.bilgorri@nesta.org.uk

Or

The Office of Sam Gyimah MP on 0207 219 3504/Sam@samgyimah.com

About NESTA

NESTA is the UK's foremost independent expert on how innovation can solve some of the country's major economic and social challenges. Its work is enabled by an endowment, funded by the National Lottery, and it operates at no cost to the taxpayer. 

NESTA is a world leader in its field and carries out its work through a blend of experimental programmes, analytical research and investment in early-stage companies. www.nesta.org.uk   

About the research

Beyond the Banks forms part of a joint NESTA project undertaken with Sam Gyimah MP for Surrey East. Backed by polling by IPSOS MORI and Evolution Securities; with input from a range of experts including Sir John Gieve (former Deputy Governor of the Bank of England), Andrew Lilico (Director of Europe Economics), and Adam Posen (member of the Monetary Policy Committee of the Bank of England).