George reports that Ed Miliband is to take inspiration from the German Sparkassen system, and establish a new network of regional banks in the UK.
Miliband, and his shadow business secretary Chuka Umunna, are positing the new banks—apparently to be anglicised as “Sparks”—as a solution to Britain’s lending crisis. The idea is that by devolving state-supported lending to SMEs down to the regional level, the banks may be able to use their local knowledge to get more return on their investment—helping the business with strong links to the local community and a record of job creation, rather than just the one which has the healthiest profit/loss ratio.
The move is supported by many. David Green, the director of the Civitas think-tank, says that, “the Sparkassen were a major factor in helping Germany bounce back from the recession so much more quickly than the UK, which has been held back by the coalition Government’s miserable failure to learn the most obvious lessons from overseas.”
But the problem with Britain’s SME lending is more complex than just greedy bankers. The ever-perceptive Dan Davies sums it up in just a few tweets:
truth about UK SME lending 1) if you don’t ask for personal guarantees, you get a hell of a lot of frauds (usually long-firms)
— Dan Davies (@dsquareddigest) March 14, 2013
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truth about UK SME lending 2) if you do ask for personal guarantees, your loan volumes go to zip-zero in any recession
— Dan Davies (@dsquareddigest) March 14, 2013
truth about UK SME lending 3) the reason why SME customers hate giving personal guarantees is that it affects their mortgage status
— Dan Davies (@dsquareddigest) March 14, 2013
in other words, once more, in the UK, housing policy is industrial policy is regional policy.
— Dan Davies (@dsquareddigest) March 14, 2013
The meme of “greedy bankers not lending to embattled small businesses” is a strong one, but as Davies says, there are far more structural problems when it comes to that market. Basicall
What we should really be looking for in the Sparks, then, is whether they can overcome those problems. They clearly can’t fix our housing market, and if defaulting on a business loan locks you out of the housing market forever then risk aversion on the part of the business owners is understandable. At the same time, to remove that barrier—to let SMEs take out loans which don’t require personal guarantees—is inviting fraud.
The big hope for the Sparks is that they will be able to crack down on fraud in other ways. If their regional basis really does render them better-placed to work out whether a particular application is fraudulent than commercial banks, then they could stand a chance of making un-guaranteed loans profitable. Alternatively, of course, the government could decide that, in a recession, the profitability of the banks is no longer an issue. The Sparks could be run at a loss, deliberately making riskier loans than is commercially sensible, until growth picks up.
That wouldn’t work as a stated policy, because the minute it was announced that they would be deliberately amenable to fraud, fraud would shoot up. But if Labour were more interested in fixing the economy than getting credit for fixing the economy, it could be a smart way to go.
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