banking update 17 Banking on uncertainty


Exactly when and how the findings of the Vickers Report may be implemented remains to be seen. For the moment UK banks are dealing with more pressing concerns, writes Richard Willsher


The Independent Commission on Banking released its final report on September 12. A key conclusion was that some banking activities should be ring-fenced from the banks’ investment banking businesses. This is potentially good news for small businesses.


”The objective of such a ring-fence,” the report concluded, ”would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers. This would be in order to ensure, first, that such provision could not be threatened by activities that are incidental to it and, second, that such provision could be maintained in the event of the bank’s failure without government solvency support.” Small business and retail banking would be inside the fence.


So we wait to see what this means in practice. Meanwhile the Bank of England’s latest Trends in Lending publication released in July reported that the stock of lending to small and medium-sized businesses contracted in the second three months of the year. ”... Some major UK lenders indicated that smaller businesses were deleveraging and continuing to repay bank debt,” the Bank advised. At the same time the volume of lending to larger businesses has remained at pretty much the same level.


In July, BDRC Continental, an independent research organisation, produced its first report into small business funding entitled ”SME Finance Monitor.” The British Bankers Association welcomed its findings saying, ”... the results ... are encouraging and show that most businesses are able to get the credit they need and that customers with a good track record and sound credit history find the process straight forward. It clearly pays to have a


Banks must be kept up to date with changes


Banks need to be kept firmly in the loop where companies are looking to make disposals, according to Rosemary Penn-Newman, partner in the Southampton office of BTG Corporate Finance, part of Begbies Traynor Group.


Otherwise, she cautioned, businesses could find themselves saddled with an unwelcome surprise.


In particular, firms needed to beware of changes to their overdraft facilities.


She said: ”Some businesses aiming to cut debt or raise cash by selling assets have found that


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – OCTOBER 2011


the bank uses the cash windfall to cut their overdraft facility simply because the company has not kept them informed of their intentions.


”Many businesses have been struggling with their cashflow and, particularly since the trials of the commercial property sector, sitting on buildings which are worth very much less than they once were. This has led to many directors being fearful that, with the reduced security, were something to go wrong they could lose much of their investment. And then money turns up unexpectedly.


In such circumstances


who could blame the bank for reducing the overdraft facility?”


That, said Ms Penn-Newman, was why it was so vital that companies kept their bank well briefed. ”Businesses should always have a close working relationship with their bank so the bank understands the strategy, and, where a disposal takes place, is aware of the purpose of the sale.


”That way the bank can take an informed decision about its commitment and, where it has concerns about the extent of its lending, at least there is the prospect of negotiation and an accommodation.


”Companies which are wary of their bank, and prefer to tell them as little as possible, will ultimately lose out.”


www.businessmag.co.uk


strong, on-going relationship with your bank as existing customers were rarely turned down...”


Finally Project Merlin, the scheme agreed by government and the country’s five largest lenders to make funding available to businesses, appears, according to the lenders at least, to be hitting its target. Reportedly, in the half year to June, over £100 billion was lent which was more than 50% of the project’s target for 2011. The Bank of England has poured a certain amount of cold water on this number suggesting that it overstates


the support the banks and government are really giving to businesses.


So while there is still debate about the relationship between SMEs and their banks, it appears to be improving. In the meantime, fears of global recession, the continuing euro crisis and resulting constriction in the market for wholesale, bank-to-bank lending have cast long shadows over the banking scene. The Vickers Report may offer comfort to retail and small business customers but banks and their customers alike face broader economic, financial and political concerns which impact their activities from well beyond the UK borders and the controls of our government, regulators and central bank. Right now all businesses, including banking ones, face as much uncertainty as they have faced since the crash of 2008.


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