I had a perfectly lovely conversation with my commercial bank manager this afternoon, though what moved me most was his nostalgic wistfulness (mainly about cupcakes) rather than anything remotely approaching business common sense.
However, it was enough to help me put a load of disparate pieces together into a single reasonably coherent picture: so here’s your cut-out-and-keep guide to how UK banks are all going to die.
Regardless of what their PR departments may like to insist, I’m pretty sure they’re all starting from the same economic Ground Zero: a balance sheet stuffed full of mis-sold loans and misvalued mortgages, together with a load of other speculative toxic stuff they bought in as bundles along the way but now can’t get rid of.
At the same time, UK banks look at startups like mine with horror: such companies are clearly battling a whole army of unknowns, all the while “we [the banks] don’t do risk“, as they say (or at least mine did today). Which – if you look at the recent history of the banking sector from the outside – is a statement that should give more or less any onlooker something of a sourly hollow laugh.
To be precise, if you are a startup, pretty much all you now have access to (apart from a maximum £25K unsecured loan, that smallest of mercies) is factoring, which – if you think about it – is simply a mechanism you use to lend money to your customers for 60+ days while you pay the interest on it. That is, as long as you can build up a suitably large basket of customers within a short period of time, it’s a short term loan facility from the bank to you based on your customer’s creditworthiness, not on yours. Small wonder that banks are using factoring to replace working capital facilities they used to offer to companies.
So what’s happening here is that banks are rebuilding their balance sheets not by fixing or revaluing their oversold loans and mortgages (oh no, they couldn’t possibly have made mistakes that big), but by trying to
rig ‘de-risk’ every other facility away from anything remotely close to a risk position. By doing this, they can continue claiming to shareholders that their net risk position is improving.
But, errrrrm… hang on a minute? The essence of economic theory is that all capital is risked (whether property, bonds, gold, currency, startup shares, etc), so this approach is both anti-economic and naive: and at the end of the whole process, the banks will surely end up with a hugely polarized portfolio, comprising both the unshiftably toxic and the unfeasibly good-as-gold, but nothing much in between.
Just as with the definition of a statistician (someone with their head in an oven and their feet in a fridge who feels that, on average, they’re doing OK), two polarized wrongs don’t make a right. And SMEs – whose financial positions are neither toxic nor gold-plated fall squarely between the two poles.
So, I’m certain that the banks’ polarizing flight to improve their net risk position on paper can only have the effect of forcibly ejecting most SMEs from this peculiarly short-term worldview. And sadly, I suspect that this will prove to be the end of the line for UK banks: with no credibility or usefulness to SMEs, UK commercial banking will wither on the vine. Bank staff are now judged more on their ability to upsell insurance (PPI, anyone?) than to evaluate business plans (don’t bother, the computer says no anyway), and the quantity of proposals fundable according to their de-risked business model must only be 10% or less of what they need to remain in business.
With Project Merlin, top-tier UK banks have made big promises to the government to lend to SMEs (£76bn in 2011, as I recall). However, I was recently told by a (different) bank manager that more or less all of the lending that the banks have placed under this banner is the ‘gold-plated’ risk-free stuff at the top pole. So, if ministers honestly believe that Project Merlin means UK SMEs will see even a sniff of that £76bn, I think they are utterly, utterly deluding themselves. Just so you know!