By Nick Corbishley. Originally published at Wolf Street
Thanks to its Brexit planning, the UK should have been better positioned to help its small businesses through the coronavirus crisis than most of its European peers. In early 2019, the UK treasury, together with the business department and the state-owned British Business Bank, laid the groundwork for a loan guarantee system for small businesses in the event of a chaotic Brexit. This meant that when the Covid-19 lockdown began, all the government needed to do was dust off those plans and put them into action. It should have been smooth sailing. Instead, it’s been an unmitigated disaster.
On March 19, the day the economy went into lockdown, the government unveiled £330 billion of emergency measures to help shuttered businesses weather the storm. Those measures included the Coronavirus Business Interruption Loan Scheme (CBILS), which the Chancellor of Exchequer Rishi Sunak said would be made available to “any good business in financial difficulty who needs access to cash to pay their rent, the salaries of their employees, pay suppliers, or purchase stock”. Yet almost four weeks later, just 4,000 of the 300,000 companies that have applied for the funds have actually received them.
“Something has gone wrong,” warned former Bank of England governor Mervyn King on Sunday. Due to a combination of voluminous government red tape, complex eligibility criteria, massive roadblocks erected by the participating banks and the temporary closure of a large number of bank branches, the amount of money so far lent out by UK lenders to small or mid-sized businesses is just £800 million pounds. That’s less than 0.25% of the total £330 billion pledged in loans for businesses, small and large.
In Switzerland, with a population roughly one eighth the size as the UK’s, 76,000 small businesses had received emergency loans worth more than CHF15 billion ($15 billion) as of April 6. Since then, the Swiss government has doubled the facility from CHF20 billion ($20.8 billion) to CHF40 billion ($41.6 billion). The much-lauded loan scheme’s success appears to rest on two basic pillars:
One, simplicity and speed. To qualify for a loan of up half a million francs, small business owners merely have to fill in a one-page form containing six basic questions, which they must answer honestly. Once the form is sent to the bank, the application is approved or rejected within no more than 24 hours. If approved, the loan is interest free, does not include penalties and is repayable in five years.
Two, zero risks for banks. All loans of up to CHF500,000 are 100% guaranteed by the state, meaning the banks have nothing to lose and are therefore less worried about the risk of providing financial lifelines to businesses whose future is far from certain, even with the loans.
In the UK, by contrast, 80% of each loan is guaranteed by the state, which means banks must assume 20% of the risk of non-payment. Even before this crisis began, large UK banks were already reticent about lending to small businesses. Worse still, many of the small firms they have lent to ended up being lumbered with dodgy financial products such as payment protection insurance (PPI) or interest rate swaps, which had an annoying tendency to harm or destroy the business’ financial health while making the bank bucket loads of money,
A large part of the problem is cultural: most big banks in the UK just don’t like lending to small businesses anymore, especially if the interest rate they stand to earn on the loan is as low as 1.5%. Yet in other European countries where emergency business loans are not fully backed by government and the interest on loans is also pretty low, large amounts of funding are already flowing to businesses.
Even in Spain, which is not exactly famed for the speed of its bureaucracy and where the government is also guaranteeing up to 80% of emergency loans and loan renewals, some €30 billion has been disbursed by the banks in the past month, many of them to SMEs. Just one lender, Caixabank, says it has so far granted €8 billion to businesses — ten times more than the whole of the UK banking sector. It’s not all wines and roses, of course. Some banks are breaking the spirit, if not the letter, of Spain’s emergency loan legislation by green-lighting loans only if a borrower agrees to take out another financial product such as life insurance.
Other countries have also had their share of problems. In Germany the emergency loans system got so overloaded at its launch that it bogged down, while in France many companies are buried under mountains of paperwork.
But nowhere has the approach been so poorly designed and implemented than in the UK. The system has already been through one major overhaul in which banks were banned from demanding personal guarantees from borrowers of loans of less than £250,000. The banks were also prevented from requiring small firms to apply for a commercial product before being considered for an emergency loan. Despite these changes, the system is still failing to get anywhere near enough money to the millions of businesses that need it.
Many business owners have said that without an emergency loan they will not be able to pay staff at the end of this month. A network of accountants serving more than 12,000 SMEs called the Corporate Finance Network recently warned that as many as a fifth of small businesses in the UK will go out of business in the next three weeks if they don’t receive the emergency cash.
“The economy will recover quickly only if we can keep the businesses that existed at the beginning of it still functioning and still able to pick up the reins when the epidemic is over,” Mervyn King said in his interview with Sky on Sunday. For that to happen, both the UK government and UK banks will have to get their act together and their priorities straight pretty quickly.
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I keep thinking that we citizens here in the US of A are residing in the worlds most handsome failed state. However, the day rarely goes by when some bit of breathtaking official clumsiness or stupidity does not emanate from merry olde England. Really, I don’t mean to be rude or to sound superior. After all, we here are hot your heels in the race to demonstrate governmental incompetence, unfairness, duplicity and institutionalized kleptocracy. Soon, we too in the greatest-democracy-in-the-world will rejoice at repeatedly shooting ourselves in the face. We too share the legacy of the Magna Carta, the Glorious Revolution and the Satanic Mills. Our future is assured.
Perhaps someone with a bit of local knowledge can explain for example why partially nationalized Royal Bank of Scotland apparently cannot put one foot in front of the other. At least this massive bungling might be explained on a more local and granular level. But that is probably far too much to ask. It might take a bit of actual labor.
Never attribute to malice or stupidity that which can be adequately explained by indifference. If the small business loan program impacted the ruling class it would have been fixed with head-spinning speed weeks ago. Compared to industries that already received their no-strings-attached multi-billion bailouts, small business doesn’t matter to anyone who matters. The demise of small business gives mega corps a boost by demolishing competition and providing buying opportunities. But it also shutters a lot of jobs and actual innovation. Doesn’t matter to the ruling class. Their wealth is almost totally financialized, a web of ownership claims and symbol manipulation enabled by rules of their own design.
There’s a dramatic difference between things the ruling class doesn’t care about and those they do. They act with great efficiency and competence when their wealth and power is at risk. We can expect small business to come out of the recession like a covid patient — with begrudging life support and perhaps permanently damaged organs.
You fixed it!
Thank you for the comment.
Proof that most citizens lack Representation. If not a majority of us; certaintly a plurality. COVID-19 has made that shockingly clear.
from my few remaining duckblinds in virtual rightyland, I detect a distinct trend towards “Fuck Them All”…similar to what one finds in the same sort of lurking view from duckblinds in (actual)leftyland.
“bunch of crooks”, like always, but with much more urgency.
phrases like “debt strike”, here and there…support for the various work stoppages and even rent strikes that are currently afoot.
very weird vibe in the Force, atm.
That said–and ,although anecdotal, accepted– I’d venture that the usual playbooks for Herd Management aren’t going to work as well as expected this time.
The graft and corruption are too frelling obvious…even to the nonwonky.
“Strike while the iron is hot”, and all…
now is the time for evangelism for a New New Deal…or for Revolution in it’s stead.
Get Out There and Talk To People(at the prescribed distance).
The evidence of the utter failure of the elite to give one hot damn about us…or their ability to run a civilisation for anyone but their withered little Ids…is all around us.
The Exceptional Country…the Richest Nation in History…the Shining City on a Hill …is a frelling dressed up slum, with a latrine out back with no damned toilet paper.
“They” will eventually pull out the old False Flag Folder again…and that must be prepared for, too.
Eyes on the Balls…which are the heads of the rich a$$holes spreading disease in the damned hamptons.
Let us strike at the Root, at long last.
Han;on’s Razor is generally speaking the best explanation for most of what happens in the execution of these systems. https://en.wikipedia.org/wiki/Hanlon%27s_razor
The malice usually occurs in the initial legislation as the various lobbyists twist and turn the language and then in similar twists and turns in the implementing regulation. By that point, it is often hopelessly complex and non-resilient and nearly impossible to execute.
RBS is still mired in litigation over its default swaps abuse of small business from the last disaster.
What does a system do? If it has existed mindlessly for centuries on a pound-of-flesh, how does it even know anymore what the value of anything is? Sort of makes better sense to nationalize the entire money system, from the treasury down to the smallest banks and dictate the process. Because the government can fiat its way out of it all. Whereas if the government is stupid it will require banks to carry some liability for giving out bad loans, thereby precluding even good loans. That is pretty suicidal policy. That’s what we all get for commingling public and private financial interests always in favor of the private interests. And poetic justice that it will bring down the tent.
Do you see the vise tightening? “loans”, “help pay your rent”… meanwhile you are not allowed (and defensibly so!) from pursuing your occupation.
If you make something, if you get paid for your hourly labor, well you literally are not allowed out of your domicile. So you can’t get paid unless you are pretty darn lucky with your employer.
However, if you *own* things then your renters are expected to get loans. They are expected to get “help” paying their rent from yet another FIRE sector parasite. They don’t get out of it, oh no.
Why the family blog don’t the owners of rental property get cut off same as everybody else. Here’s my proposal – everything goes into stasis for 3 months. We stiffs (many possibly soon to be stiffs for real) don’t have to pay the darn rent or mortgage. OMG! But: the rental agreement (which is a b*tch to get out of, at least here in the Unequal States) is extended 3 months. Your mortgage is extended three month, *but* it accrues no “unpaid interest”!! it’s just frozen like a lot of working people’s life is.
How is that hard? Why is that bad? The gummint keeps us fed and housed (maybe not clothed :D), however you normally make your income, for that time. Stasis until this passes.
Funny how when they bombed Pearl Harbor this crap wasn’t a problem.
I’ve been amusing myself by reading Gilded Age fiction, at no charge from Project Gutenberg. I know the principle: Gentlemen do not engage in Trade. To the banks, small businesses are a completely different species. One might just as well loan money to ones foxhounds.
Asking the Banks to underwrite 10% of the loans is either malicious and bad faith, or stupid.
The Tories in power are not stupid.
Banks minimize risk. In their position, everybody would not loan their own money to the poor. Bankers are measures on profit, and bad loans fail that test.
Either way, the Government can state there is a program, and the poor get nothing, and the Government can blame the poor for having bad credit habits.
Twas ever thus: Are there no poorhouses? etc…
All of this doesn’t matter to the UK electorate. What REALLY matters to them is Brexit.
Most people in the UK are fed up to their back teeth with Brexit.
+1
Oh really?! Is that why they voted for the tories?
If you believe Boris, Brexit is already done.
I think not dying is more at the top of the list. I know someone who’s mom-in-law died after getting Covid-19 in hospital. She was there to get dialysis, not to get Covid-19. The person I know and their partner now have to quarantine for 14 days as they took her to the hospital to get her dialysis. I also know someone who’s brother is a fireman. He has been retasked to go and get dead bodies from private residences. So, I think the UK is maybe not as worried about Brexit as the fact that lots of people are dying all over the place.
Also notice – fearless leader is not anywhere to be found. They will not update on how he is at Chequers (best you get: “He is recuperating”). Recovering from Covid-19 is awful if it goes bad. The UK isn’t just going to go back to how it was. And I don’t mean that in a positive or negative sense…
1. Four out the five largest UK Retail banks are trading under $5.
2. This means that 80% of the UK Retail banking system is substantially distressed, impaired, or otherwise seriously F’d Up. Otherwise they would not all be trading under $5.
3. No wonder why most participating banks are erecting massive roadblocks. As financial intermediaries, they can not, dare not even assume 20% of the risk of non-payment. This means the Coronavirus Business Interruption Loan Scheme (CBILS) could make trillions upon trillions of Pounds available to these intermediaries and they still would not make loans available to the businesses that need it.
4. Because the UK banking system is apparently so g-dam impaired, they are failing to act as financial intermediaries. This means there will be systemic bankruptcies of UK businesses at the end of April. And as the UK businesses fold, that will further impair the UK banks. And then these UK banks themselves will go under. And no one is looking at this, especially Mervyn King, who definitely appears to be stupendously blinkered at this moment in time. If King is this blind, God Help the UK in the months ahead.
5. What I don’t know is what the precedents are or will be for failed banks in the UK. But they are going down. Lloyds is trading near $1, Santander and RBS near $2, and Barclay’s near $4. The UK banks need a bailout scheme immediately if the UK hopes to avoid systemic bankruptcies in three weeks. And Mervyn is not on it.
6. While Mervyn King said, “The economy will recover quickly only if we can keep the businesses that existed at the beginning of it still functioning and still able to pick up the reins when the epidemic is over,” But Mervyn’s focus is misplaced, It should be focused on saving the banks so they can act as intermediaries. The window of opportunity appears to already be shut since I don’t hear jack-shit from Mervyn about a scheme to bailout these UK banks. It is like that clip from the movie, Airplane. “Everything is [not] going to be alright. You have to believe that,” said Leslie Nielsen, just before the shit hits the fan, and Julie Hagerty asks, “What happened Ted? What went Wrong?” What happened Mervyn? “I dunno. Something has gone wrong, though!” Shit. And, at the moment, shit for brains