There’s a lot of chatter about, not least in government circles, that banks are not lending to small and medium enterprises (SMEs) which are the main job creators in the British economy.

Banks are currently in an invidious position. They are being prodded to lend more, while simultaneously adding billions to their capital reserves. Non-expert ministers and MPs, such as Vince Cable, imagine that because a couple of banks received public money as a bailout, they are duty bound to risk yet more in a very uncertain marketplace.

What then are the facts for a bank like HSBC, one of the world’s largest:

So what are the facts? HSBC’s new small business lending was up 38 per cent in the first half; across all top banks and all small firms, the amount of new lending is down on 2009, at £520m per month, just enough to match repayments and defaults. Why? Demand for credit has dropped. Uncertainty means firms are trying to reduce their debt; small firms hold a record £56bn on deposit. HSBC’s corporate overdraft utilisation rate has fallen to 42 per cent, from 44 per cent: facilities are not being used. Rates are neither ultra-cheap nor extortionate: small corporate borrowers are not usually being priced out.

The supply of credit has also diminished. Banks have rightly become more realistic when assessing projects in a low-growth environment. Some lenders have quit the market. The remaining ones have been told to put more money aside (boosting capital), to shrink balance sheets, and to borrow less on the wholesale markets (a problem given that low saving rates have forced many banks to rely on money markets to fund new loans).

It’s not rocket science. Perhaps the Lib Dem contingent in the Coalition Government will have less to say on the matter in future.

Quote: City AM

There’s a lot of chatter about, not least in government circles, that banks are not lending to small and medium enterprises (SMEs) which are the main job creators in the British economy.

Banks are currently in an invidious position. They are being prodded to lend more, while simultaneously adding billions to their capital reserves. Non-expert ministers and MPs, such as Vince Cable, imagine that because a couple of banks received public money as a bailout, they are duty bound to risk yet more in a very uncertain marketplace.

What then are the facts for a bank like HSBC, one of the world’s largest:

So what are the facts? HSBC’s new small business lending was up 38 per cent in the first half; across all top banks and all small firms, the amount of new lending is down on 2009, at £520m per month, just enough to match repayments and defaults. Why? Demand for credit has dropped. Uncertainty means firms are trying to reduce their debt; small firms hold a record £56bn on deposit. HSBC’s corporate overdraft utilisation rate has fallen to 42 per cent, from 44 per cent: facilities are not being used. Rates are neither ultra-cheap nor extortionate: small corporate borrowers are not usually being priced out.

The supply of credit has also diminished. Banks have rightly become more realistic when assessing projects in a low-growth environment. Some lenders have quit the market. The remaining ones have been told to put more money aside (boosting capital), to shrink balance sheets, and to borrow less on the wholesale markets (a problem given that low saving rates have forced many banks to rely on money markets to fund new loans).

It’s not rocket science. Perhaps the Lib Dem contingent in the Coalition Government will have less to say on the matter in future.

Quote: Allister Heath, City AM

In a TV interview on Sky News, Michael Geoghegan, Chief Executive of HSBC said the new 50 percent tax rate in the UK was “strange” and was causing many bankers to leave the UK to set up in Switzerland and other countries. He himself is moving his office to Hong Kong next week, although the banks HQ will remain in the City of London.

“I think when you start moving taxation for political reasons, the trouble is that it is an industry that can move,” he told Jeff Randall Live. Asked if damage was being done, he replied: “Yes.”

Hethought people in the UK had been given an easy ride because interest rates had been slashed close to zero, but he predicted pain ahead as inflation rises. “As interest rates come back up, that’s going to start squeezing and that does need to happen.”

Mr Geoghegan will, however, still spend up to a third of his time in the UK. He believes Britain needs to wean itself off debt and rein in its fiscal stimulus “sooner rather than later. How we finance our lives does need to change and I think, as the Governor of the Bank of England came out and said, we’ve got to start with our shopping list, we’ve got to cut our costs and I think that needs to start, not just in the UK but in other places, to stimulate all the economies.”

He said UK moves to toughen up regulation risked making the City unattractive. “The UK is leading it and it has been doing some very sensible things but the rest of the world hasn’t come forward so in a way I think maybe the UK is moving too fast.”

Mervyn King, Governor of the Bank of England has suggested more British banks may have to be nationalized in order to get them lending normally again. The alternative is many years of sub-trend growth.

Here’s the statement:

“The measures taken over the past six months were designed to stabilise the banking system and prevent failure. What’s become apparent is that nobody knows what level of capital they need to hold in order to be willing to make judgements about lending on the same criteria as you would regard as normal… In the long run, the only way to overcome this is for banks to get back to a position where they’re sufficiently well-capitalised that the degree of risk aversion that they exhibit towards their lending practices returns to a more normal level of risk aversion and not the extreme risk aversion which is being exhibited today.

“Higher capital would resolve that. How much capital, we simply don’t know. There was an interesting contribution from Alan Greenspan which suggested that several percentage points extra capital would be needed in American banks over and above the levels that regulators are pushing them to to get them to a more normal lending state.

“What’s very important to distinguish between and to my mind this is the big lesson of the last three, four five months, is that there is quite a big difference in practice between the levels of capital that banks need to be stabilised – in the sense that the creditors are reassured that the banks can continue as viable entities – and the levels required to persuade banks to exhibit normal levels of risk aversion. How big that gap is is absolutely impossible to say. I know of no scientific basis on which you can set that figure, but it looks as if it will be quite big.

“And what that means is that it will take time for the banks to get that extra capital. They are bound to be cautious about the rate at which they expand lending. It is a difficult problem to deal with. If the banks are going to continue as private sector entities they will naturally behave in a risk averse way for a while. That’s one of the lessons of history in terms of balance sheet problems.

“They could put in more public sector capital if they decided to do so but that has to be a judgement for government, and it does have ramifications for the Government’s shareholdings in banks because the amount you’d need to put in would undoubtedly be significant relative to the size of privately owned capital at present, and that does raise a whole series of awkward questions – but that is a matter for the Government.”

Not a nice prognosis and signs that the recent “bull” market and green shoots could all be in vain.

John Evans