WEEKLY COMMENT 12-12-2013
By Barry Edwards
The Bank of England’s plans for SME’s
The new authority given to the Bank of England (BofE) by parliament since the financial crisis has given its senior management real responsibility to oversee banks to prevent a similar disaster happening again. Their powers are comprehensive and allow proper control over lending practices that were not part of their concern since the creation of the former regulator, the Financial Services Authority (FSA).
Ever since the disbandment of the FSA, the new organisations that have been created to manage the financial community have been very proactive in advising and suggesting how banks and the associated institutions should act. This has been well received by those people connected with the financial system as the BofE is the only authority that can effectively influence behaviour and prevent contravention of the rules.
Andy Haldane, BofE executive director for financial stability, has given an interview with Financial Times. He said the BofE’s Financial Policy Committee (FPC), on which he sits, is ready to push through supply side reforms to the financial sector as it seeks to enhance the country’s growth prospects. The FPC’s initiative to revive the securitisation market is an example of the BofE acting as ‘conductor of the orchestra’ bringing together multiple parties that have conflicting interests.
He pointed out, that sort of intervention is quite a shift from recent practices at the bank drawing a parallel to the time when the BofE played an active role in finance for small business in the 1940’s. Such supply side interventions are legitimately ones that the FPC might want to engage with where it sees this market failure and where it sees that intervention might usefully support the wider economy.
Mark Carney, the Governor of the BofE, also announced last week that the Funding for Lending Scheme (FLS) would cease supporting lending for mortgages and concentrate entirely on lending to SME’s. It is clear that there is a definite concentration of support from the BofE to make sure that the financing of SME’s is made a priority and they will do all they can to make it happen.
In the 1940’s, the BofE purchased promissory notes issued by companies, mainly SME’s. They are not proposing that this market should be re-established but looking to encourage the creation of an active market in securitised SME loans packaged into bonds and if necessary purchase them to keep interest rates at a reasonable level.
This is very proactive stuff from the BofE and is exactly what we have been proposing should be established in these weekly comments over recent weeks. In various announcements, the BofE have stated that new organisations should be created to package these loans and a rating system should be developed to qualify the riskiness of the lending for the ultimate purchasers.
What all this means is that the BofE and the government are getting serious about extending the facilities available to SME’s and using all the levers they have at their disposal to bring it about. This is very encouraging and it is the first time any real effort is being made to help the SME sector beyond the minimal support provided by the department of Business Innovation and Skills (BIS).
There is no organisation that can provide all the services to fulfil the BofE requirements but it is possible they might eventually evolve from the alternative finance providers we have discussed in these weekly comments in the past. Crowd funding is the generic name of most of these funding providers who are beginning to have an impact on the market for SME’s offering an alternative to the banks and asset backed finance companies.
They would have to link up with accounts management firms, such as Validis and the credit insurance companies namely Coface, Atradius and others. Creating the organisation from scratch would take a long time and the need to make this happen within a reasonable time frame is imperative. We will have to see if the BofE can get these firms around the table to discuss this project. It would be commercially beneficial for the companies that participate and create new income streams for the services they currently offer.
It is a pleasure to see the BofE planning to stir up the city firms into finally making funding available for SME’s which have been ignored for too long by these institutions and be willing to purchase bonds if there is any slack in demand for them. There is a long way to go yet but it is clear the BofE is not going to stand by and let things continue as they are.
That’s all for this week, the weekly comment will not be posted over the Christmas period until early next year. The staff at Txtreme would like to take this opportunity to wish readers a Happy Christmas and New Year.