State banks appeal to SMEs, but there are better options

Simon Nias
Friday, September 23, 2011

The economist Adam Posen is a man that few printers will have heard of before this week. Known primarily for being the arch-dove on the Bank of England's nine member Monetary Policy Committee, Posen has long been advocating (loudly and in isolation) a further bout of quantitative easing.

However, in the past week, Posen stopped banging his QE drum for long enough to sound a different tune, namely that the UK government should set up a state-owned bank to lend to SMEs. Ignoring for a minute the fact that we have two (virtually) state-owned banks already, neither of which is falling over itself to lend to printers, let’s look at this proposal.

By all accounts, lending to SMEs remains constricted and an institution that could improve the flow of credit to them would be a huge benefit. However, is another high-street bank really the best way to do this? Finance professionals I’ve spoken to say "no".

This is because a bank is a complex and costly institution and there’s no guarantee a new one would be of any greater support than the existing institutions – unless it’s going to be given orders to go out and lend regardless, à la Fannie Mae and Freddie Mac. A better bet would be to set up a commercial finance business that would use asset-based lending to fund SMEs.

This would allow the state lender to provide finance to both distressed and growing businesses securely, while additional cashflow lending could be supplied via mezzanine finance. This solution has the benefit of having a low cost of entry – basically all you need is access to the capital to lend – while also opening up the pool of prospective borrowers.

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