Lend more or face higher taxes, Cable tells the banks

The Business Secretary has put himself firmly on the side of small firms on the question of who's to blame for lower-than-expected lending...

by James Taylor
Last Updated: 19 Aug 2013
Is it the banks' fault that they failed to lend as much money to SMEs as they promised under the Project Merlin agreement? Or is it - as they would argue - due to a lack of demand from the firms in question? The good news (well, unless you're a banker) is that Business Secretary Vince Cable thinks the former is closer to the truth: he told a Business Innovation and Skills select committee this morning that some banks aren't taking the problem seriously enough - and promised that the Government would hit the industry with higher taxes if they don’t raise their game rapidly. OK, so this would be mightily unfair to those that are doing their bit. But it will certainly give the sector a strong incentive to get its act together...

Lending to SMEs came in £2bn below the Merlin target at the last count; naturally, the banks blamed a lack of demand while small firms complained about it being impossible to get funds at a decent rate. In truth, the answer probably lies somewhere between the two, but Cable seems convinced that SMEs are at least partly right. 'We believe there is an issue with the supply and cost of finance and it is inhibiting recovery, ' he told the committee today.

Some banks seem to be doing better than others. Cable singled out Lloyds, which apparently now has SME lending as an agenda item at its monthly board meetings; presumably this is the bank Cable thinks is 'leading the way in cultural change' (although he refused to specify directly). Santander also said at the time of the release of the Merlin figures that it was on track to fulfil its own obligations to SMEs, so that's clearly doing something right too.

As for the rest of them, Cable clearly thinks it's time to wield the big stick (not that he's ever exactly chummy towards the banks). He said today that if they haven't got their act together in a year's time, the Government would 'take further action on tax... Clearly we do have the option of approaching the taxing of profits, or bonuses or balance sheets in a different way'.

Cable appeared to rule out sanctions on individual banks (for reasons that aren't entirely clear to us). And you might argue that this is pretty unfair to the likes of Lloyds and Santander who are trying to play ball. But the Government knows that higher taxes are the best way to hit the banks where it hurts - and it's clearly hoping the threat of this nuclear option will be enough to bring the rest into line.

Handily, the chief execs of Lloyds, RBS, Barclays and the chairman of HSBC are all appearing before the Treasury Select Committee this afternoon to talk about the recommendations of the Independent Banking Commission. Cable's timely reminder will only increase the political heat they can expect to face.

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