Posted by on November 27, 2013 at 11:04 am

  • Kevin RowlesEconomics lecturer Kevin Rowles on the revelations of the Tomlinson Report on lending by the banks.

“The report by Laurence Tomlinson, the entrepreneur-in-residence at the Department for Business, Innovation and Skills has made headlines with the accusation that the Royal Bank of Scotland (RBS) is forcing small- and medium-sized firms (SMEs) into bankruptcy and then acquiring assets at below value.  Karl Marx would have been interested in such practices because this behaviour was one part of his examination of the inevitable demise of capitalism.  The Tomlinson Report is reinforced by the simultaneous publication of the investigation by Sir Andrew Large, which suggested that the RBS has left itself open to accusations of unfair behaviour towards SMEs because of its secrecy.  Tomlinson argues that the RBS has closed down businesses… ‘the businesses affected are often perfectly viable and, but for the actions of the bank, would have been able to positively contribute to UK growth’.

However, these assertions need to be examined in the cold light of day.  Firstly, the evidence of Tomlinson is anecdotal and RBS has contested the allegations.  Certainly, the recovery rate for firms placed in the bank’s recovery division is very low, but it must be remembered that in the past few years, banks have supported many firms which have poor long-term prospects.   Such ‘zombie’ companies have been tolerated because of the reluctance of banks to acknowledge poor assets as they attempt to rebuild their balance sheets.  Given the depth and length of the downturn since 2008, the rate of bankruptcy amongst SMEs in the UK has been low historically.

Secondly, the events in the financial markets in recent years have made banks much more risk averse.  They are likely to demand higher quality opportunities than in the past as they restructure and thus collateral that may have made the grade previously is no longer acceptable.

Thirdly, there have been allegations for some time that the banks are not willing to lend to SMEs.  Whilst in part, the weakened position of the banking sector may lead to reluctance to lend, it is also true that there is a demand side to the market and firms have to want to borrow.  With slow growth, investment and expansion plans have often been put on hold.

Finally, we need to recognise the extent of the banking crisis that occurred in Britain in 2007 and 2008.  In the autumn of the latter year, the British banking system came close to meltdown and the recovery from that nadir is likely to be a long one and it is unlikely to be without difficulties.  A return to normality in the banking sector will not be smooth and there have been many casualties in the process.

The recovery is still underway and the continual stream of revelations about behaviour in the financial markets in past years should remind us that the important thing is that banks pursue more conservative activities and that these activities are better regulated.  So far, the jury is still out as to whether the financial system is ‘fit for purpose’.  Continuing scandals such as the rigging of interest and exchange rates together with the mis-selling of financial products reduces confidence in the banking sector.  We should be wary of government initiatives to encourage more lending to homebuyers – this is repeating the mistakes of the past.  So too are the ambitions of Mark Carney, Governor of the Bank of England, who stated that he is relaxed about a further expansion of the financial services industry in the British economy.  The politicians are also not beyond suspicion as they try to boost the economy as the election approaches and need to find reasons to explain the poor performance of the economy in the recent past.”

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