Bank lending in the UK is still stalling, down 2.2% in real terms last year – and far behind G7 average

Publications that covered this story include Daily Express, The Guardian, The Times and City AM, 4 August. It was also covered on Reuters, 4 August.

• Smaller businesses hardest hit by “hidden credit crunch”

Bank lending to the private sector in the UK is still lagging far behind the G7 average, despite all the Government’s efforts to boost the availability of credit, according to our recent study.

Private sector credit volumes in the UK were down by 2.2% in real terms in the last year from $4,442bn to $4,344bn, while average lending across the G7 economies increased by 0.1% in real terms.

The figures show that for the UK’s small businesses in particular, the credit crunch lingers on.

The UK is one of many developed countries that has seen a stagnation in bank lending to the private sector. In both the UK and the US, for example, modest expansions in lending in the last year were wiped out by inflation. In the US there was a real terms decline in bank lending of approximately -0.1% in 2013 (see table below).

Over the four years since the depths of the global recession*, the volume of bank lending to the private sector in the UK has declined by -0.58% in absolute terms, and by -4.74% in the US.

The other countries most affected by the continued fall in bank lending since the depths of the recession were those hit hardest by the banking crisis, including Spain, Ireland and Italy. Others such as Australia and Canada, which escaped the global recession, have fared much better.

Laurence Sacker, Partner in our London office says: “Nearly six years on from the start of the banking crisis, we are still seeing virtually no increase in bank lending in the UK.”

“This continued drought in bank lending in developed economies is not just a question of appetite – it’s about regulation. Anxious to prevent a repetition of the banking crisis, regulators now require banks to hold more capital against their activities, and that is making lending more expensive.”

“While things are slowly starting to improve in the UK, it is not enough to kick-start the growth in capital investment by businesses that we need to see. The Government and Bank of England need to consider what else they can do to lower the cost of loans to SMEs.”

Smaller businesses hardest hit, as funding problems continue despite recovery

The continued slump in lending in the UK has hit smaller businesses the hardest, as bigger companies have been able to access the bond markets to fill the gap in funding. The volume of bond lending in the UK has increased by 35% in the last four years. In other major markets such as the US, lending through corporate bonds has increased by 44% over the last four years, while in France it has increased by 35%.

Laurence says: “Corporate bonds have long been a good way for larger companies to get the funding they need, but as bank lending has dried up, they have now become a vital tool. Smaller businesses don’t have the same luxury, as issuing bonds can be quite costly in terms of advisory and other fees.”

“Efforts to create a bond market to help SMEs, while welcome, will come far too late for this economic cycle.”

He adds, “Although the recovery is now taking hold in many developed economies like the UK, problems over bank funding are far from over. Many banks are still unable to lend, especially to smaller businesses, leaving them facing a hidden credit crunch.”

The companies find that available bank finance is too expensive, with lending margins too high. This leaves businesses struggling to find appropriate finance to deal with cash flow problems or make capital investments.

Laurence says, “Demand for loans is increasing, but the banks are generally not granting new requests unless they are from existing customers with a good track record and security. That’s leaving many smaller businesses that have struggled through the recession but are now on a more stable footing, still out in the cold.”

“Initiatives such as Funding For Lending, which was designed to encourage banks to lend, has had a limited impact on small business lending, and if restricted access to funding continues, it risks creating a drag on the UK’s nascent economic recovery.”

Bank of England figures show that net lending to SMEs by banks participating in the Funding for Lending Scheme fell by -£0.7 billion in the first quarter of this year.

UHY adds that although new, alternative forms of finance such as crowd-funding have been gaining traction, these are unlikely to provide an adequate solution for most established businesses. Invoice financing, which is growing in popularity, may be more appropriate, however it is unlikely to be able to fill the gap created by a decline in traditional bank loans.

UK falling behind BRIC economies, as lending to key emerging economies soars

In contrast, in many major emerging economies, bank lending continues to soar, with the so-called BRIC nations (Brazil, Russia, India, China) leading the way. Brazil has seen bank lending to the private sector jump 115% since 2009, and lending in China has risen 112%.

Even though with the exception of China, inflation in the BRIC economies was high, lending growth remained very substantial even in real terms (see table below). The average lending growth across all four countries in 2013 was 18.7%. In China, lending expanded by 21% in the last year, and inflation was relatively moderate at 2.6%.

Laurence says, “Bank lending in emerging markets, which has surged since the global recession, still shows no signs of abating. While typically banks have been comfortable with their emerging markets lending because overall levels of indebtedness are relatively low, there are now growing concerns about whether debt levels in China are sustainable, and what the impact on other countries will be should there be a credit crisis there.”

BANK LENDING TO PRIVATE SECTOR BY COUNTRY

Country

% change (4 years)

% change (1 year)

Annual inflation rate (2013)

Real Terms % Change (1 year)

BRAZIL

115.20%

17.90%

6.2

10.59%

CHINA

112.14%

21.40%

2.6

18.27%

INDIA*

88.90%

14.20%

10.9

1.76%

RUSSIA

72.17%

18.90%

6.8

10.85%

SINGAPORE

54.30%

16.90%

2.4

14.05%

MALAYSIA

36.66%

13.60%

2.1

11.21%

BELGIUM

20.52%

1.70%

1.1

0.56%

CANADA

19.54%

4.70%

0.9

3.76%

AUSTRALIA

17.16%

5.40%

2.4

2.86%

CZECH REPUBLIC

12.76%

2.50%

1.4

1.04%

AUSTRIA

12.67%

-0.90%

2

-2.91%

FRANCE

9.75%

-0.10%

0.9

-0.99%

DENMARK

4.84%

-0.60%

0.8

-1.41%

MEXICO

4.72%

-0.60%

3.8

-4.36%

NETHERLANDS

3.64%

-0.70%

2.5

-3.23%

GERMANY

3.42%

1.30%

1.5

-0.22%

CROATIA

3.10%

-4.00%

2.2

-6.12%

GREAT BRITAIN

-0.58%

0.40%

2.6

-2.24%

ITALY

-0.91%

-2.40%

1.2

-3.53%

IRELAND

-1.40%

-5.90%

0.5

-6.36%

JAPAN

-2.22%

3.40%

0.4

3.04%

USA

-4.74%

1.40%

1.5

-0.13%

SPAIN

-10.54%

-6.50%

1.4

-7.80%

BRIC AVERAGE

97.10%

18.10%

16.29%

G7 AVERAGE

3.50%

0.10%

0.13%

For further information about this article, please download the full pdf report: Trends in global bank lending in the post-financial crisis era