Banks required: Must specialise in lending to smaller businesses
Banks that specialise in small business lending are needed as part of a drive to increase competition in the banking sector and would boost lending to the smallest firms, says the Federation of Small Businesses (FSB).
More than a decade since the Cruickshank Report said that more competition was needed in the banking sector, the number of banks in the UK has fallen by 20 per cent according to figures analysed by the FSB.
Data from the last 10 years of British Bankers Association Abstract of Banking Statistics has shown that there were 420 banks that could take deposits in 2000. In 2010, this figure fell to 332 – a 20 per cent reduction.
Back in 2000, the Cruickshank report also said that the four main high street banks had an 83 per cent share of the small business market. As the number of UK banking groups and their subsidiaries have reduced by 46 per cent since that time, those main four banks now hold 85 per cent of the market.
The FSB has long called for more competition in the banking sector. The credit crunch and the subsequent squeeze on the banks have lead to a further reduction in the choice of banking services for small firms.
The FSB believes that the Independent Commission on Banking's (ICB) proposal to separate the investment and retail divisions of banks will help small businesses to get a fairer deal.
However, while structural change is needed to help stability to prevent another ‘credit crunch', more competition will be vital for the long term future of the economy.
To promote competition, the FSB is calling for the ICB to recommend that:
- Any moves to force the state-owned banks to sell off more branches than the EU Commission recommends should be used to help new entrants
- Small and new banks are not penalised under prudential regulations which require them to hold more capital
- Financial regulators look at shared services that will help new entrants to the market as well as how to offer a branch network – for instance through using the Crown Post Office Network
- The newly created Financial Conduct Authority must be given the powers to investigate and recommend policies which focus on increasing competition
John Walker, National Chairman, Federation of Small Businesses, says "Not only are there fewer bank branches on the high street, but there are also fewer banking groups. Even though Santander now has a small percentage of the small business banking market, the main four banks actually hold a larger share of the market than they did 10 years ago.
"The lack of competition in the sector is the most important thing that the ICB should focus on in its full report in September. The lack of competition gives small businesses less choice, and it also means that the cost of finance is more expensive.
"Allowing new or even specialised banks to buy branches from the state-owned banks would boost competition on the high street; helping to drive down costs and gives the smallest of businesses a fairer deal."