The UK’s Funding for Lending scheme should be broadened to include non-bank lenders, argues BVCA chairman Mark Florman.
It will come as no surprise that the financial crisis and its aftermath have severely curtailed the availability of finance in the UK. Banks are struggling to repair their broken balance sheets, while simultaneously meeting the capital requirements mandated by Basel III. The IPO market remains challenging, and although boosting the availability of equity finance is a policy objective with considerable merit, it is one that is unlikely to bear real fruit until the mid to long term. The taps need opening now.
The Bank of England’s Funding for Lending scheme (FLS) – launched last year – aimed to succeed where other, similar ventures, had failed by offering banks considerable incentives to boost their lending – the more that they lend the more they could borrow from the Bank of England, and at progressively cheaper rates. Unfortunately, the Q4 numbers for the scheme were disappointing.
The approach remains sensible however and should be pursued, albeit with a number of tweaks. The remit of the FLS could be expanded to include non-bank lenders who are not currently focused on rebuilding their own reserves, as well as to institutional investors who should be allowed to participate if they commit new capital to the UK.
The rationale for doing so is primarily two-fold. First, debt or mezzanine funds can essentially invest in business directly, thus plugging the funding gap that has yet to be filled by the banks. Second, they can provide finance for leveraged buyouts – transactions that could prove very effective in resuscitating so-called “zombie companies”, that have just enough cash to survive, but not enough to invest and increase productivity.
These funds do not have depositors nor pose a systemic risk. As such, their efforts can be focused purely on providing returns for themselves and the economy, rather than concerning themselves with the process of complying with macro-prudential and conduct regulation.
Unfortunately, non-bank financial intermediation has received a bad press since the financial crisis. The time for finger pointing has come and gone: we must now acknowledge the importance of a diverse funding ecosystem to the country’s economic vitality, and set about achieving it. Take the US, where 80 percent of the country’s senior debt market is held by institutional investors. This ensures that domestic businesses can continue to access loans, even at a time when the country’s largest banks are shrinking their balance sheets. This should be a model for the UK to follow.
The FLS is a laudable initiative that still has the potential to be one of the Coalition Government’s major success stories, but it should be rolled out to the providers of finance that have the capacity to get capital out of the door and to businesses immediately. More broadly, it is time to recognise the limitations of asking the banks to finance economic recovery.
Mark Florman is chairman of the British Private Equity and Venture Capital Association.