Jobs and Growth

Steve Barclay Excerpts

Thursday 17th May 2012 Commons Chamber

[Stephen Barclay (North East Cambridgeshire) (Con)]

It is a pleasure to follow my colleague on the Public Accounts Committee, who I always feel puts the “Great” in Great Grimsby.

A number of Members raised the issue of credit for small businesses. The hon. Member for North Ayrshire and Arran (Katy Clark) focused on that, without wanting to give a specific solution, as did her colleague, the hon. Member for Leeds East (Mr Mudie), and, on the Government Benches, my hon. Friend the Member for Northampton South (Mr Binley). But the debate so far has not focused on one of the chief impediments to credit for small businesses: the high capital requirements imposed on banks, which makes it expensive for banks to give credit to small businesses, particularly those deemed to be high risk. To put that in context, at the moment around one quarter of Royal Bank of Scotland’s corporate book is designated as high risk.

It is not just a small sector of the small business and corporate market that is having difficulty accessing credit. The reason for that really goes back to the financial crisis. I think that the right hon. Member for Edinburgh South West (Mr Darling) was correct, following the collapses of 2008, to take a more risk-averse approach to capital requirements, and that led to the requirements we see today. The point I want the House to focus its attention on is whether we can bring greater urgency to the resolution mechanisms that apply to banks, including looking at living wills so that purchasers are in place if a bank gets into trouble, enabling others to step in and take the liability on and away from the taxpayer. If we take the liability from the taxpayer and give banks greater security by pooling assets through insurance mechanisms, we can take a less risk-averse approach to capital requirements. That, in turn, means that banks will be under less pressure to call in loans.

One of the consequences of banks calling in loans is the forced sale of assets, with businesses selling at a time not of their choosing and when the price is not right. Currently, when businesses seek credit to expand, often only short-term credit is available. Banks do not want to lend for the long term in case there is a deterioration—the eurozone is the most visible risk—and by lending short term they can churn loans and impose brutal charges. The impediment to businesses that want to expand and take on additional staff—a business’s biggest overhead is usually employing staff—is the lack of capital. Seeking that capital is therefore difficult. Banks do not want to lend because of the costs that they incur, and if they do lend they pass the costs on to small businesses through brutal charges and wide spreads in interest.

If our Front-Bench team can accelerate some of the special mechanisms that are available through the pooling of risk, through living wills and through identifying purchasers, we will avoid some of the risk that we saw with the Royal Bank of Scotland. Scandalously, for example, after the Treasury undertook 10 months of intensive work, Sir Nicholas Macpherson could not rely on what the balance sheet said the assets were valued at. The scale of the regulatory collapse that we faced and the continued uncertainty of the risks means we now need to put in place those resolution mechanisms if we are to get credit flowing into the small-business sector.

Let me give an example from my own constituency to bring this issue to life. Just this week, a business got in touch, telling me that its site was cramped and that it had borrowed just under £2 million to expand. Its turnover is up, and its profits are up, to £500,000 a year, but it can get only short-term loans on that £2 million. It cannot therefore expand its staff, despite the opportunities its new site offers, because of the spread of interest and the brutal charges attached to that £2 million loan. So I say to our Front-Bench team, let us speed up the resolution mechanisms, reduce the charges from banks lending to high-risk businesses and, as a result, let the credit flow to those businesses so that they can expand and deliver the jobs and growth that Members on both sides of the House seek to achieve.

[Several hon. Members]

rose—