Wednesday, April 24, 2013

More than ever, business needs a revolution in banking. Thoughts on the Co-op, Lloyds, FLS and JLS.

I was lined up to go on BBC Radio 5 Live on Wednesday to talk about the Bank of England’s announcement that it was extending the Funding for Lending Scheme (FLS). The news was all a flurry when two other events jumped up the agenda – the break-up of JLS and the collapse of the Co-operative Bank’s deal to buy 632 Lloyd’s Bank branches.

When Andy Verity, the business reporter leapt from his chair, breaking the peaceful hum of the Five Live newsroom at that early hour, I knew something big was going down. For preparation I was checking through the Bank of England press release and had just read Luke Johnson’s excellent column in the Financial Times where he called for more competition in the sector.

My initial thought was that this is a disaster. It looks like a real kick in the balls for Peter Marks, outgoing CEO of the Co-operative Group, who was offloading assets and clearing the decks to integrate a large business into the bank in order for it to become a real player. He’d been positively crowing about it and had been given the highest level endorsements possible from George Osborne.

Robert Peston claimed the withdrawl from this deal was an indication of the Co-op’s possible exit from banking altogether, a remarkable and dramatic reversal if proved true. I’m not so sure.

Clearly then, it’s also a bit of a blow to any of the government’s ambitions (and of the Labour Party) to encourage more competition in the banking sector.

Pretty quickly, Lloyds announced that the branches would be floated as the Trustee Savings Bank (TSB). A swiftness of foot that rather exposes the tardiness displayed by Royal Bank of Scotland when its deal to sell branches and customers to Santander fell apart. For all his skill in shrinking RBS, Stephen Hester clearly had no Plan B up his sleeve.

Though if a bank doesn’t want the branches and £25bn of deposits, why should anyone buy shares in TSB? That’s one to ponder.

All of this starts to scream for urgent action for a properly funded bank that can lend to smaller and medium sized businesses. One too that is closer to the heart of the regional economy and one less concerned with City issues. One that will be part of a Northern Revolution of policy, planning and economic management.

My own view for what it’s worth is that the lack of lending at the moment is as much about demand as it is about supply. Confidence is the biggest barrier to any business taking out a loan.

But there are a few other interesting trends in the emerging economy. For a start there are signs of growth from the fast growing “gazelle” companies who have grown in the last year, the FT, quoting Experian data, said there has been a ten per cent increase in medium sized businesses to 4,353. These are the companies targeted by the Goldman Sachs 10,000 Small Businesses programme and by GrowthAccelerator. These businesses get good advice and are well served by banks. Funding for Lending has reduced the cost of money for these businesses, it has not made money available to more companies.

The issue is new start-ups and businesses who are constricted in what they can do. They may have the idea and the ambition, but don’t know where to turn. The UK small business market deserves a banking service that can be their friend.

Another process that could unlock dormant capital in the economy is the large numbers of companies who were missold complex interest rate swap products as a condition of a loan. These are anchors on growth and profitability and need sorting out.

But here’s an alternative thought. The Co-operative backing out now is a blessing. The previous evening I’d attended a very useful event at the new group HQ in NOMA where Ruairidh Jackson talked passionately about the best strategy for members, about creating great places in Manchester city centre that contributed to the life of the city. The board has a responsibility to members, that the Co-op is different. It was Chatham House rules, so I can’t be too specific, but maybe what we have just witnessed is an act of great bravery that could just be the best decision the Co-op have taken in a decade of bold moves.

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