Why the banks are still strangling British business
This month marks the fifth anniversary of the start of the credit crunch.
In the summer of 2007, the inter-bank lending market ground to a halt, after banks became increasingly fearful of each other's solvency. Deprived of this funding, banks tightened their belts, lent less and desperately tried to hoard cash.
Banks behaving badly
With several banks coming within days of going under, you'd expect them to be forever grateful to the British public for riding to their rescue. In fact, the past half-decade has seen a string of banking scandals, each bigger than the last.
While many of these swindles and mis-selling scandals have hit individuals (notably the massive mis-selling of payment protection insurance), UK businesses have also suffered at the hands of bungling banks. Here are five reasons for businesses to doubt and distrust the UK's banks.
1. Libor manipulation
On 27th June this year, Barclays admitted that it had manipulated two key interest rates – Libor (the London Interbank Offered Rate) and Euribor (the Euro Interbank Offered Rate) – between 2005 and 2009. Barclays rigged these rates to boost the profits of its interest rate traders. As a result, Barclays paid fines totalling £290 million to US and UK regulators.
Unfortunately, Barclays' admission is just the tip of the iceberg, as regulators in 10 countries are investigating up to 20 other banks for rate-rigging. Although it's incredibly hard to work out how this manipulation harmed UK businesses, around $350 trillion (£223 trillion) of financial instruments worldwide are linked to Libor.
Today, British firms should rightly be wary of loans linked to this discredited benchmark.
2. Interest rate swaps
On 29th June (just two days after Barclays' shaming), the UK's 'Big Four' banks – Barclays, HSBC, Lloyds and RBS – owned up to mis-selling interest rate hedges to small- and medium-sized businesses.
These instruments, known as rate swaps, allow businesses to switch variable interest rates charged on loans and other credit to fixed rates. By buying swaps, firms can protect against future rate rises and thus keep their repayments affordable. Purely to boost bank profits, this simple, straightforward insurance was turned into a complicated, dangerous gamble. When rates tumbled, thousands of British businesses lost out as these hedges moved against them, creating large losses. In addition, cancelling these swap contracts became cripplingly expensive.
Since 2001, these four banks have sold rate swaps to over 28,000 businesses, many of which will be due compensation. What's more, on 23rd July, seven more banks agreed with the City watchdog to have their rate swaps independently reviewed. No doubt billions in fines and payouts will follow.
3. Killing their customers
Between April and June of this year, 4,115 companies in England and Wales went into compulsory liquidation or creditors' voluntary liquidation. That's an average of 45 companies failing every day.
While some of these businesses crashed because they were badly run, ran out of cash, became unprofitable or were beaten by fitter rivals, a sizeable minority had the rug pulled out from under them by banks.For example, I know of one local, established firm that was profitable and growing, but was forced into receivership when Lloyds (which is 41% state-owned) suddenly pulled the company's long-standing overdraft. This caused a 20-year-old business to fail, putting nearly 60 people out of work.
With banks continuing to pull the plug by foreclosing and cutting credit limits, even for established and profitable firms, young entrepreneurs are increasingly wary of entrusting their futures to banks.
4. Lending less
During the boom years of the Noughties, banks would lend to just about anyone. These days, as banks shrink and rebuild their balance sheets, they are terrified of lending to all but the biggest, safest corporations.
Hence, lending to small businesses has crashed to historically low levels. According to financial pundit Will Hutton, only a twentieth (5%) of UK bank lending goes to UK businesses. Of this, only a twentieth goes to SMEs (small- and medium-sized enterprises). Therefore, just 0.25% (£1 in £400) of bank lending goes to the firms that are the very backbone of British business.
For start-ups and small businesses to become big businesses, banks need to turn the lending taps back on. Until this happens (perhaps spurred on by the new £80 billion Funding for Lending scheme), small businesses will struggle and survive, when they should expand and thrive.
5. Rising rates and fees
The final problem for UK businesses is that banks keep grabbing a bigger slice of the profit pie by boosting their lending margins and fees. Since 2009, the Bank of England's base rate and other lending rates have tumbled, but rates for lending to businesses have barely budged. As a result, banks make fatter profits by borrowing cheaply and lending at far higher rates to credit-starved companies.
In addition, banks keep introducing new and higher fees on business bank accounts and lending facilities. For instance, I'm ready to move my business bank account after my existing bank raised its fees and started charging for a swathe of previously free transactions.
In summary, banks owe their very survival to the British public and UK firms. It's high time they acknowledged this by fairly treating both individuals and businesses and showing us all a lot more respect!
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