George: A Dead Man Walking?

One can only speculate whether the Chancellor of the Exchequer has seen the 1995 film, directed by Tim Robbins, and based on the true story of Sister Helen Prejean, called ‘Dead Man Walking’. She created a special relationship with Matthew Poncelet, a prisoner on Death Row in Louisiana.

The Chancellor has been focusing on the death throes of his various initiatives to stimulate lending to Britain’s Small and Medium Sized Enterprises (“SMEs”). Project Merlin, the credit-easing plan and Quantitative Easing (“QE”) have come and gone although QE3, adding another £50 billion of printed money, is underway.

The economy remains moribund, lending to SMEs is not happening, the introduction of the SEED/EIS equity funding scheme (announced last November) is still awaiting the passing of the Finance Bill and has over sixty pages of rules and regulations for qualifying companies (less than two years old and with less than £200,000 of gross assets).

The latest wheeze is called ‘funding for lending’. Banks and building societies will be able to secure their funds for a fee of 0.25% a year providing it is net new lending. If their advances fall the fee can increase up to 1.25% pa. Up to $80bn is being made available. The scheme also applies to individual lending. Institutions will be able to borrow up to 5% of their existing loan book. The plan starts on 1 August 2012.

There are three obvious flaws in this scheme:

a) Banks don’t like lending to SMEs. They are too much trouble for too little reward.

b) The ‘funding for lending’ does not provide any cover for bad debts. Why should the banks take on risky lending? They must work for their shareholders.

c) The banks’ regulators (a mix of the Bank of England and the Financial Services Authority) want the banks to strengthen their capital ratios.

The likely outcome is that some smaller banks and building societies will take advantage of the scheme. It is hard to believe that the main banks will be impressed with the cheaper finance.

With the start of the Olympic Games and the Parliamentary recess only days away it is likely that this scheme will wither on the bow. The next six weeks are going to difficult for Britain’s SMEs. The Chancellor himself seems under some pressure and there is speculation about a job swop with the Foreign Secretary. There is a long (possibly) hot summer ahead.

The term ‘dead man walking’ was a call used by prison guards in the United States to clear the way when they were taking a prisoner on Death Row for his execution.

It is to be hoped that on or around 5 September 2012 in the corridors of number eleven Downing Street the cry of ‘funding for lending’ does not indicate the dreaded drop for its inhabitant as he walks the corridor to meet with the warden.

This article is written by Tony Drury who tweets @tonydrury39.