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Springtime for German small business loans while British SMEs stay trapped in credit freeze
Britain should learn from local "savings and enterprise" banks in Germany and Switzerland
The German and Swiss economies are powering ahead of the rest of Europe through superior lending to small and medium sized businesses, according to a new report from independent think tank Civitas. German savings banks and Swiss cantonal banks, lessons for the UK by Stephen L. Clarke, Research Fellow at Civitas, argues that the UK system suffers from a lack of competition and a lack of locally-oriented banks committed to serving the needs of Britain's SMEs.
Instead of urging the City to relax lending, as George Osborne and Vince Cable did in a recent meeting with the heads of the major banks, the Government should bypass the big banks altogether by making the banking sector more diverse and competitive. Specifically, they should encourage locally-focussed savings banks to provide credit in the public interest and for a modest profit. This model has produced tremendous successes in Germany and Switzerland.
Britain's wheels spinning
Many of the UK's banks suffered considerably during the recent crisis. Even those who were more successful in weathering the down-turn have not provided the credit that growing British businesses need. Evidence from the University of Warwick indicates the failure of British banks to support small businesses:
British start-ups in 2008 obtained 12.4% of their start-up finance from their local bank. In contrast German start-ups obtained 27.7% of their finance from this source, according to research carried out by the KfW bank in Germany. (p.9)
British entrepreneurs have to use far more of their own savings or the resources of their families and friends to fund their business than their German counterparts. (p.9)
The Chancellor George Osborne and the Business Secretary Vince Cable have demanded that banks restrain themselves from paying big bonuses, especially cash bonuses, and lend more to SMEs. However it is not clear what weapons the Government has in its arsenal to influence the banks that will be unwilling to agree to either demand. The one suggestion, resurrected last week, was for an increase in taxes targeting banks, particularly a bonus tax.
The Civitas report suggests an alternative to this servile reliance on big commercial banks. In Germany and Switzerland, local savings banks have a 'dual bottom line' to be both commercially viable and to achieve social objectives, such as supporting new enterprises and local businesses.
Germans shifted up a gear when recession hit
Germany's economic recovery has been the envy of the developed world. In the 2nd quarter of 2010 the country saw GDP growth of 2.2%, the best quarterly growth for decades. (p.10) This dramatic expansion in economic output has been powered by the SMEs of the German economy, fuelled not by large commercial banks, but by the country's traditional savings banks.
The German savings banks increased lending volumes to local businesses by over €9 billion between the 3rd quarter of 2009 and the 2nd quarter of 2010. (p.7)
From 2000 to 2008, the savings banks outperformed the commercial banks with an average return on capital of 4.63% compared to 3.19%. (p.13)
Germany's Savings Banks are overseen by municipal or regional governments. Their business is restricted to a particular locality. They use conservative business models which place primary emphasis on taking in deposits and making loans available for local businesses and individuals. (p.11)
Cantonal capitalism - not just for clockmakers
During the recent economic downturn, Switzerland's total industrial output never fell below 2005 levels and growth during the crisis was significantly above the OECD average. (p.17) This is despite Swiss commercial banks, in particular UBS, suffering enormous losses as a result of the crisis. Swiss businesses can draw on local savings banks based in each Canton with a mandate to support local enterprises. (p.19)
The Association of Swiss Cantonal Banks (ASCB) increased lending volumes from 41 billion Swiss Francs in 2007 to 47 billion in 2010, excluding mortgages, taking customers away from Switzerland's two large commercial banks (UBS and Credit Suisse). (p.17)
Despite holding much smaller assets than the commercial banking sector, the cantonal banks were over CHF 7 billion more profitable than UBS and Credit Suisse from 2003-2008. (p.21)
Cantonal banks have helped launch innovative new businesses - including Dacuda, a start-up that produces hand-held computer scanners that double up as mice, and BoneArtis, which produces artificial bone materials for medical use. (p.20)
Competition and pluralism, not behavioural change
The UK's banking sector suffers from a lack of competition, especially in the market for SME lending. Four banks (RBS, Barclays, Lloyds and HSBC) account for over 70% of the market and as these banks have been dramatically cutting back on lending, credit for SMEs, who power the British economy, has been freezing up. (p.6) The Civitas report argues that tackling this underlying problem will be more successful than cajoling the banks into lending more easily, or mandating that they do so with likely unintended consequences.
It is impossible to simply 'import' the successful models of the Swiss and German banking systems, but it is possible for the Government to change the law to promote competition. By doing so a number of different banks may emerge. Cooperatives, publicly owned-banks or PLCs who notice the current gap in the market can all serve SMEs to close the 'equity gap' (p. 3). What is important is that the Government recognises it needs to facilitate the growth of locally-orientated, financially stable banks, which serve the real economy.
Stephen L. Clarke said: 'The Government needs to look at the banks it now effectively owns and ask itself, "are we aiding and abetting a monopoly that is damaging British businesses?" If so then the Government should create a legal framework that will allow local "savings and enterprise banks" to emerge and force existing banks to fight harder to keep their customers.'
For more information contact:
Stephen L. Clarke on: 020 77996677; mobile: 07707233188
David Green on: 020 7799 6677
Notes for Editors
i. German savings banks and Swiss cantonal banks, lessons for the UK by Stephen L. Clarke can be downloaded here.
ii. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.