Innovative credit easing will greatly boost lending to SMEs says new report
The Treasury could significantly boost lending to SMEs by adopting an innovative approach to credit easing.
This is according to a new report by Will Hutton and Professor Ken Peasnell of Lancaster University Management School for the Big Innovation Centre.
The paper calls on the Treasury to create Special Purpose Vehicles (SPVs) which would buy high-quality SME debt from banks, enabling originating banks to increase investment in businesses. The new scheme would mean banks could invest less of their own credit in SMEs. And with measures in place to disincentivise risky lending, these investments would be profitable for banks.
Will Hutton, co-author of the report said: “This proposal achieves three aims simultaneously. Firstly, it incentivises loan origination with the organisations that have the capacity to screen and monitor loans – banks - by enabling access to the cheapest finance. Secondly, it provides a ready, controllable and easily adjustable means to stimulate economic activity in a targeted way. Thirdly, it creates the conduit for cash created by Quantitative Easing to flow directly into business activity.
“These are advantages that other proposals, such as a special SME bond, do not possess. As a result, the government could produce the public good of more contra-cyclical SME lending to stimulate and rebalance the economy at the same time. We estimate the new lending could exceed £15 billion by 2013/14, equivalent to a fiscal stimulus of around 1% of GDP.”
The proposal would see Special Purpose Vehicles (SPVs) set up for each participating bank. Unlike securitisation, which facilitated the downturn, these loans would be controlled by tight measures. The Treasury would have the power to reign in the process if it felt SMEs were being over-funded – averting the risk of bankruptcy. In addition, loans from banks to SMEs would carry fewer risks by being subject to normal commercial rules.
This would provide banks with the incentive to carry out proper risk assessments when considering loan applications and to continue to monitor risks when servicing the loans.
The report argues that by adopting this proposal, the government could significantly raise levels of investment, innovation and employment in the UK by 2014.
The paper, entitled Credit where it’s due: How to revive bank lending to British small and medium sized enterprises, is part of a series of research reports for the Big Innovation Centre, an initiative of The Work Foundation and Lancaster University.
www.biginnovationcentre.com