Banks, lending for some, pretending for others

Revealing figures from the British Bankers Association last Monday.

As we all know, the banks are supposed to be supporting business through the 'funding for lending scheme' - except they appear not to be doing so. And as we all know they are at the same time under pressure, supposedly from new regulation but also from a starting point of over gearing, to reduce their balance sheets - but this also looks to be a highly selective process.

It now looks like the banks are taking the government's cheap funding for lending money and effectively using it not to support SMEs, small or medium, but to roll-over lending to larger corporates. I'll show how this is suggested by the figures below, but, perhaps more controversially, I'd like also to point out here that larger corporates have been hoarding cash rather than borrowing.

How are we to square the actual lending recorded by banks with the picture we have of risk averse larger corporates hoarding cash, paying off debts, and raising funds from bond markets?

I fear there is of course no real problem. We are describing the real world so the reality has to be out there somewhere. What surely is happening is that lending recorded as corporate-not-SME includes buy-out lending 'crammed down' in to the operating entities, and that this is the component that is expanding.

Whilst real business people are being squeezed by banks and are handing real cash over to pay down debt, those fortunate enough to live in the make-believe world of private equity (you know, the one where banks lend without cross guarantees from owners across the different projects they are involved in) are being supported by banks. The banks know that attempting to enforce the buy-out debts would knock their clients off their precarious pedestals. These bad debts have not been acknowledged yet by banks.

Large buy-out loans are handled by well paid-bankers who have clout and bonuses. SME loans are handled by lower forms of life and/or computers. Actually its the latter that generate profits for shareholders. But when banks talk about supporting business, it appears they mean their private equity friends.

The SME loans are real lending, lending that can be and is being repaid. The buy-out loans are a pantomime which in good times rewards all those who benefit from the call option generated either by obtaining a job as a private equity banker or knowing the phone number of one. A pretty good description of 'noughties elites that!

And as for the the BBA figures, here they are:

   GBP bln                                        Dec 11                   Dec 12                   change

1   Small business  (a)                    33.0                       32.7                     -0.3                       -1%

2   Med business   (a)                     58.3                       54.9                     -3.4                       -6%

3  Larger business (b)                   200.3                     200.5                     +0.2                       0%

4  Total non fin business (c)      291.6                     288.1                     -3.5                       -1%

5  Total Financial (c)                     331.1                     350.1                    +19.0                     +6%

6  Total                                               622.7                     638.2                    +15.5                     +2%

a)      From SME BBA statistics Monday 7 March

b)      Difference 4 and sum of 1 and 2
c)       From December 2012 BBA statistics

SME lending down, larger business lending flat, financial lending (which probably includes some private equity amongst other things), up.

All comments welcome.
Ed, Outsure     11 March 2013

Ed Outsure can be contacted at citizent@live.com