Vince Cable has rebuked the Bank of England on Wednesday for blocking reforms to lending rules that currently favour mortgages over loans to small businesses, reports The Guardian. The business secretary said the regulator stood in the way of changes to banking sector regulations that demand lenders keep bigger reserves to support business lending than they do for residential mortgage loans.
In a speech in London, Cable said high street bank chiefs had warned him that business lending was unlikely to increase while draconian capital requirement rules treated business customers as a higher risk than mortgage borrowers. He said: “The way the regulatory system operates has undoubtedly had a suffocating effect on business lending and particularly on our exporters.
“Not surprisingly, the result is that banks pump out lending in the mortgage market, while lending to small businesses is restricted. This directly stems from the rules on which the regulatory model is based and has had a very damaging impact.” He said the Bank refused to bend rules to favour small businesses because they were set internationally and could not be amended.
The Bank of England believes lending to small and medium sized enterprises (SMEs) is more risky by its nature and requires higher capital to guard against bad loans. But it has previously argued that banks with larger reserves enjoy lower capital costs and can therefore arrange cheaper lending to customers.
It has also offered capital relief on new SME lending for banks that participate in the funding-for-lending scheme. “I’m not suggesting there is some perverse individual blocking all this. I just think the situation could be freed up and the decision-makers are sitting inside the Bank,” said Cable. He also warned that an early rise in interest rates could put the economic recovery at risk, the Telegraph reported.
“If these incipient inflationary pressures lead to a rise in interest rates sooner and further than is warranted by the economy as a whole, it could place in jeopardy our hopes for a sustained and balanced recovery,” he said.
The business secretary has campaigned for the government to take a more robust approach to boost business lending. He has set up a business bank, which has lent £780m and is involved in a pilot to use government funds to underwrite SME lending by commercial lenders. “This would allow banks to lend significantly more with the same capital buffer,” he said.
Adam Marshall, director of policy at the British Chambers of Commerce, said: “Vince Cable’s remarks are encouraging to all those who believe that access to finance still bedevils many new and growing companies across the UK.
“More can and must be done to increase the responsiveness of our banking system to the needs of the real economy. As our own research shows, banks still face significant challenges in reconnecting with many businesses. Greater competition, more proportionate regulatory requirements and the rebuilding of relationships and trust all have a role to play.”
Marshall said the business bank should be “radically scaled up” and added: “It must get closer to UK businesses and their needs, and have the ability to work directly with companies in some instances if it is to become a truly game-changing institution. Scaling up and strengthening the business bank must be a top priority in future years, no matter who forms Britain’s next government.”