Vince Cable's threat on bank loans

Published on Monday 26 July 2010 15:36

MINISTERS yesterday warned they could bring in fresh taxes on bank profits if a lack of lending to businesses threatens the economic recovery.

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The government also estimated 50 billion of new lending to business could be generated if banks limited bonuses and dividends.

Launching a consultation document to set out options for improving the flow of cash to firms, Business Secretary Vince Cable said small and medium-sized firms were facing a "very serious problem" in raising finance.

"If bonuses and dividend payments are too big, the government has the option of looking at taxation of their profits. There is a choice between giving out cash in bonuses, or re-investing. There are potential sanctions available which we hope are not necessary."

He also warned banks that he could ask them to sign up to the type of loan guarantees already agreed by part-nationalised banks RBS and Lloyds if they did not act.

Cable said there was currently a "dialogue of the deaf", with business groups complaining of the difficulties in accessing finance while banks maintained they were meeting 80 per cent of requests. Regional stock exchanges, more government loan guarantees and moves to boost banking system liquidity were among other options to increase the flow of finance.

The consultation document, Financing A Private Sector Recovery, estimated that if the major banks limited bonus and dividend payouts to pre-crisis levels, they could generate around 10bn of additional capital which could in turn sustain 50bn of new lending.

Cable said there was a basic problem of transparency in bank lending adding: "It is very difficult to find out what is going on. We are pushing to improve things."

In response to the proposals, the British Bankers' Association stressed that high street banks loaned a net 6.8bn in June to businesses and that, despite the recession, lending to smaller firms is "stable and borrowing by larger firms has shown some improvement".

Angela Knight, chief executive of the BBA, also said that it was in no-one's interests for banks to lend to companies which would struggle to repay loans. "Lending to SMEs is not risk-free. Businesses need to show they have enough coming in from the goods and services they provide to repay any borrowing."

The proposals were welcomed by business groups. Andy Willox, policy convenor for the Federation of Small Businesses' in Scotland, said: "Not enough flexible, affordable finance is reaching UK firms. Developing finance solutions for small businesses must now be the priority, not simply servicing the needs of a few elite companies in high-growth sectors."

As a green paper, the consultation document contains proposals rather than a commitment to action.

Banking and finance lawyer Rod MacLeod of Tods Murray said, despite the tough talk, it was "more carrot than stick".

"It's clear that the paper is very much an exploratory document and that for the time-being at least government-led incentives and initiatives such as loan guarantee schemes are preferred over direct state intervention."