Banking Sector Competition ‘Key To Avoiding Double-Dip Recession’



Earlier this week the Federation of Small Businesses (FSB) published a report calling for Government action to improve the competitiveness of the UK banking system. They believe that without greater competition in the banking sector, the economy will once again slide into recession.

The FSB consultation ‘Financing a private sector recovery’ was commissioned in response to the Coalition Government’s oft-stated belief that the only way forward for the UK is through private sector growth. This thought has been the driving force behind the harsh public sector job cuts that will be forthcoming.

The consultation mentions that the four main banks in the UK control a total of 83% of the small business banking market. The FSB feel that this needs to change significantly so that the lending behaviour of these large players in the banking industry will be altered.

Small business lending is a very hot political topic at the moment. The lack of lending during the financial crisis was criticised by the media, politicians and the small business community. The FSB consultation suggests that the stranglehold that the four main banks have over the industry is the main reason why there is currently such a monopoly on lending.

Four out of ten small businesses currently rely on banks for credit in the form of overdrafts, loans, factoring or leasing. Because of the lending monopoly, the big banks are still able to charge huge interest rates despite base rates being at an all-time low.

The FSB have suggested a number of recommendations to improve the situation. They feel the Government must refrain from selling its shareholdings in nationalised and capitalised banks to other banks. In addition, the Government should promote financial intermediaries to help small businesses without access to finance plus introduce a series of regional capital markets and community investment trusts. This should provide greater access to finance and increase stability of the banking industry for the future.

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