A decade after the collapse of Lehman Brothers and the 2008-09 crisis, Greg Carter, CEO of Growth Street discusses what has happened to the availability of funding, lending and finance for UK businesses
‘Prediction is very difficult, especially about the future.’
The Danish physicist Niels Bohr’s famous observation hasn’t stopped a generation of economists spending ten years bickering over who should have predicted the financial crisis of 2008, and whether the ensuing years of relatively sluggish economic growth might have been avoided.
I don’t think there was any one single pinch point that tipped the financial services ecosystem over the edge. But what still stands out in my memory is the long queues of quietly worried citizens spilling out of Northern Rock branches, desperately hoping that their money was safe.
A decade on from the Northern Rock episode – the first run on a British bank since the 1860s – we have seen various regulatory efforts aimed at preventing a repeat of such disastrous mismanagement. Capital holding requirements have been strengthened, and there have been clampdowns on riskier lending practices.
Lehman Brothers @Jorge Royan
Amid all the efforts to rein in the excesses of the big lenders in the aftermath of the crisis, we should remember that from the perspective of Britain’s small- and medium-sized enterprises (SMEs), the experience of dealing with banks has, if anything, become even more of a struggle.
Ventures like the British Business Bank, created after the crisis to help small businesses with finance, have created new paths for growing companies to access finance. But at the same time, other government initiatives have barely moved the needle when it comes to delivering capital to the businesses that need it.
The shiny new Bank Referral Scheme, for instance, has delivered £15 million to businesses since it launched in late 2016. That’s a relative rain drop compared to the ocean of finance that has been withdrawn from SMEs. As an example, Growth Street research suggests that the SME overdraft lending gap that’s appeared in the last ten years could be as high as £18 billion.
The Lehman Trilogy Credit: @National Theatre
In making sure they don’t fall foul of more stringent capital requirements, banks have become less forward-thinking and inventive. Instead of taking advantage of the overdraft model – simply drawing down from a pot of money as and when required – many innovative new businesses have been encouraged to adopt less flexible funding arrangements like invoice financing or term debt.
Regulation is not solely to blame for the insufficient business lending we’ve seen from the banks. Traditional lenders have found themselves hamstrung by legacy IT infrastructure: earlier this year, TSB laid bare the chaos that can arise from this complexity. Many banks are rushing to explore new partnerships with fintech firms. But can the old incumbents drag themselves into the 21st century, or will they have to spend big acquiring younger competitors who can do some or all of that job for them?
Wall Street, NYC: @MarshalN20
There are reasons to be cheerful, of course. In my view, the green shoots that have sprung up since the crisis are being propelled by technological innovation and good honest competition. The government’s failed attempt to spin off Williams and Glyn from RBS has created a significant pot of money that’s currently up for grabs. The fund, which has been earmarked by the government to promote greater competitiveness in SME business banking, stands at £425 million: this could really make a difference to fuelling substantive change in the sector, and shows that government-mandated policies don’t have to be dead on arrival.
So there are still opportunities for real positivity to come out of the upheaval of a decade ago. Personally, I couldn’t be more excited to see how the alternative finance sector matures over the next ten years. New ideas and intrepid entrepreneurs are changing the way people and businesses borrow, lend and save. That the pace of this change has coincided with the banks’ reduction in lending is probably not a coincidence. Last year, Funding Circle, shortly to list on the public markets, lent almost as much to SMEs as all the high-street banks put together. I can’t think of a better way to illustrate how far the financial sector has changed since 2008.
Northern Rock: @Lee Jordan
The overreach that sent the global financial sector into meltdown inevitably led to belt tightening. But I think the process of recovery led to some lenders forgetting what lies at the heart of most economies: the business owners and SMEs who are responsible for so much job creation and employment. The better they’re served, the better an economy is set up for long-term success.
I’m pleased that alternative finance and fintech has been able to take up some of the slack created by an extended post-crisis recovery. But to deliver a financial system that is competitive, innovative and inclusive in equal measure, banks must sit alongside their smaller competitors, providing the sensitive, understanding support and investment our businesses need. Let’s hope the next 10 years move us closer to that happy state of affairs.
Greg Carter is the founder & CEO at SME lending business, Growth Street.