Small Business Bank: why not a complete overhaul?

Source: Telegraph April 2010 (Steve)

Vince Cable valiantly announced his flagship, financial policy of the Small Business Bank at the Lib Dem conference. The positive way to look at this would be see the appetite and potential for trying something different, or, dare I say it, a ‘Plan B, C, D or maybe Z’.

Firstly, it isn’t a bank as you know it (a retail bank) as it will not actually provide any loans. Instead, it will be a new investment bank – cue first 2007 financial crisis recollections – where the Government will buy loans that banks have made to companies.

So, the Small Business Bank will provide long term liquidity (finance) to private banks by buying the banks’ liabilities (loans), bundling a collection of these liabilities together and selling them to pension funds or any other investor. Presumably this is to avoid the Treasury’s wrath as they hold the purse strings.

This method is known as ‘securitisation’ – cue the second recollection of recent financial problems.

The problem is that it is a half-hearted answer to the issue of lending and requires further development. Cable is effectively trying to set up a system similar to Germany but with the bonus of having none of the key benefits.

In Germany, under a federal, political system, a regional bank provides long-term liquidity to banks that operate within its region (for example, city or district savings banks). Effectively it is a second tier of banking between a national bank and the small, local branches. The locally run and owned banks will then take deposits as well as offer loans to individuals and small businesses. The regional bank will then be able to take a regional approach and invest in key public goods, such as infrastructure.

Cable’s approach seems to be taking a regional, federal model and applying it to a national scale with solely private banks. Instead of money being supplied by a regional bank (Government run) to a small city bank (local Government run) i.e. Germany’s system, Cable wants to provide more liquidity for large private banks. Therefore, all it does is allow large banks to reduce the risk.

The problem for me is that it effectively says that the market is working well and that it would continue to do so if there was more liquidity. As a result, given much of policy is formulated with the ‘national’ rather than the ‘regional’ in mind it neglects both spatial and sectoral elements. Ignoring the geographical element means lender and borrower are no closer together nor aligned than before while ignoring the sectoral issue means it lacks any capability for active industrial policy. Useful intervention is about more than flooding the market with liquidity.

Unsurprisingly, I fall into the ‘overhaul the system’ camp. At the bare minimum, Cable’s plan needs a regional aspect but we have the opportunity to go further. We should decentralise finance and responsibilities away from central Government and allow a partnership between financial professionals and local authorities to set up banks which would lend to businesses as well as invest in infrastructure, or any other state-led objective (for example, housing or green technology). Only in providing liquidity for regional, publicly owned institutions can I see the worth in Cable’s national vision.


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