Check against delivery
It’s a huge privilege to address the IoD’s annual conference today.
As you may have heard, the first set of GDP figures for this year have just been released. And so, if I may, I would like to start by addressing what is disappointing news. The ONS’s preliminary estimate for Q1 GDP has shown a fall of 0.2%.
Many people, many of you, will now be asking what this means. I asked myself the same thing when I heard the figures too.
To answer that question, we need to step back for a moment. Step away from the clamour for panicked reactions, the inevitable calls for the government to lurch this way or that, to ask ourselves, quite simply, are the basic building blocks of our strategy right?
Pulling the country back from the brink by repairing the public finances.
Reforming our financial system to protect the taxpayer from future crises.
Rebalancing our economy away from its overreliance on one industry, financial services, in one city, London, so that growth is spread and prosperity shared.
These are not overnight projects.
We have undergone a profound trauma in our economy, the depth and breadth of which we are only just beginning to grasp.
By 2016 our economy is forecast to be 11% smaller than it would have been had the 2008 banking crisis not happened.
We’ve witnessed an unprecedented combination of events: financial collapse; an overleveraged housing market; staggering levels of public and private debt. So fixing the damage takes time and commitment.
Our task has been nothing less than to rescue, repair and reform the British economy as challenges continue to confront our major trading partner - the Eurozone. So there are no short cuts.
And we have to remember where we would have been had we not taken these difficult decisions.
Because of our action on the deficit we have kept the markets at bay while our neighbours have been picked off one by one. We’ve kept interest rates at record lows. Because we have stuck to our plan, the UK - the country which had the biggest budget deficit in any advanced economy, bigger than Greece, Portugal, Spain - will, by the end of this Parliament, have a deficit lower than the G7 average.
So, yes, this morning many people will have questions about what these figures means for the UK. But our answers are the right ones to repair the damage done.
Not easy, but right.
Turning then to the subject I was keen to focus on today: access to finance.
There are a lot of other areas where the Coalition is taking action to give firms freedom, certainty and support. Cutting - and capping - red tape; investing in infrastructure; prioritising spending on skills and apprenticeships; radically reforming planning laws; cutting corporation tax; reforming income tax to put more money in your customers’ pockets. Those last two were the real centrepieces of last month’s Budget.
But I know - as a constituency MP more than anything else - that credit remains a top concern for many businesses. And we have a real problem here because, if the banks aren’t lending enough; you can’t grow; our recovery is slowed.
Some people are saying that reforms intended to fix the banking sector are actually making the problem worse. That efforts to replace recklessness with responsibility have swung the pendulum too far the other way.
The central criticism is this: because the banks have been instructed to build up their capital stocks under new international regulations, BASEL III, and following the Vickers report, they’re rushing to fill their black holes. And, in the process, becoming too risk adverse in their lending; too demanding in their terms.
So let me be clear on the government’s position: I don’t apologise for taking a tough approach. The events of 2008 represented a catastrophic failure of regulation, the likes of which must never be allowed to happen again.
These, more stringent, capital requirements are essential for building a banking sector that is strong and reliable - which business needs too.
Indeed, in Europe the UK is resisting attempts to dilute the measures - which would leave our economy exposed.
But these new requirements are not a reason to sacrifice business lending - because the banks don’t need to meet them overnight. The banks are not in some impossible catch 22, and it is not beyond them to get the balance right.
They should take advantage of the flexibility built into the regulation. The very sensible timetable gives them until 2019 to meet their capital targets and they should, simultaneously, maintain lending to business.
Some people, in the banks, argue that demand is the reason lending’s down. And I don’t deny that demand may be an issue. But I hear time and time again that firms are desperate for loans, and there is no excuse for turning down solid applications from viable businesses.
And there are questions we need to ask:
How much capital are banks devoting to business lending compared to their trading operations?
How much are they distributing to shareholders or top executives, compared to business?
My message to the banks is this:
Yes, of course, get your balance sheets in order. Meet the new capital requirements. But don’t lurch to the other extreme at the expense of lending. Don’t unnecessarily hoard capital when businesses need credit. Don’t sit on your hands while firms are crying out for cash.
And understand that supporting good businesses is in your interests too. Healthy banks have diverse portfolios - lending to business for the longer-term as well as participating in the short-term money markets. And a prospering banking system needs a growing economy as much as everyone else.
For the government’s part, we’re doing everything we can to increase the flow of credit and finance to SMEs.
Our fiscal policies have created the monetary space for the Bank of England’s quantitative easing programme, giving the banks more capacity to lend.
And, while Ministers can’t march into the banks and start taking individual lending decisions for them, we can and we are using our position to exert pressure.
That’s how we negotiated £75bn for SMEs through Project Merlin, and how we got them to set up the £2.5bn Business Growth Fund to invest in high growth UK firms.
Despite the enormous strain on the public finances, we’re also devoting huge resources to supporting lending.
Last month we launched the £20bn National Loan Guarantee Scheme, and we’re providing funding directly through a number of programmes including, for example, the £2.4bn Regional Growth Fund, which supports firms in communities too reliant on the public sector.
And, in addition to these levers: fiscal policy, pressure, direct support, there’s another, one we’ve perhaps talked less about: competition.
Driving lending by creating a financing landscape that is much more competitive and diverse.
Our financial sector has become dominated by a handful of global giants, so preoccupied with their investment arms, so bewitched by the high returns offered by the international money markets, that they don’t always remember how to do good old fashioned business banking.
I’ve lost count of the times I’ve heard about local branch networks being left to wither on the vine.
Look across the Atlantic and you’ll find three times as many independent banks as here in the UK. Germany has a network of hundreds of local savings banks, who match local depositors’ money to the needs of local business.
We need to break open the market here in the UK so that your firms have more choice and so the banks have to compete.
That means two things: more competition within the sector, as well as more alternative sources of finance outside it.
In the sector, we’re already seeing positive signs, more challengers to the larger incumbents. Handelsbanken, the Swedish bank, are setting up more branches here. Their brand is very much built on local managers taking local decisions.
The relatively young Aldermore bank will be participating in the Government’s National Loan Guarantee scheme - so it’s not just the big players.
In the consumer sphere, Virgin Money and Metro Bank are steadily growing their branch networks. And we want to see more of that.
So one of the new financial regulators, the Financial Conduct Authority, will have an explicit duty to promote competition in financial services and markets and outside of the traditional sector, because this is so important.
Government is intervening directly to create more alternatives to the big banks.
Stepping in, for example, to boost finance to specific, high value industries. That’s the purpose of the Green Investment Bank, the world’s first national financial institution devoted to unlocking low carbon growth.
And we’re doing something no government has ever done before: investing in non-bank sources of finance.
Tim Breedon, the Legal & General CEO, looked into this very issue for Vince Cable.
He found that many of the alternative financing mechanisms that exist out there, if properly harnessed, can help close the financing gap.
Not to replace traditional banks - which will always have a crucial role to play - but to compliment them.
Like peer-to-peer lending: platforms that introduce investors or lenders to firms needing cash. Many of you will know how they work: as kind of dating agencies that match people with money to entrepreneurs. The Americans have just passed a new law to make peer-to-peer platforms easier to set up.
Supply chain finance is another.
Say you supply parts to a big manufacturing plant. Perhaps, under the contract, they have three months to pay you, but maybe you can’t wait that long.
Under these schemes a third party lender will step in and cover your bill. They know the big plant will pay up, so they give you the money, confident they’ll get it back. And - crucially - at an interest rate close to the one the plant enjoys. You effectively use the bigger firms’ clout to get paid.
Then there’s mezzanine financing.
Loans with an in-built holiday - so you don’t begin repayments straight away. A lifeline for people with great ideas, but who will take a bit of time to start seeing a return.
Many of you will have come across these models, but you’ve told us that they can be difficult to access.
There’s real potential there, but someone needs to step in.
Since the late 1990s we’ve seen government do that with venture capitalism, to help tackle the equity gap.
Now we need to be similarly ambitious on non-bank financing to help tackle the finance gap.
So the Coalition will do that as part of our £1.2bn Business Finance Partnership.
£700m will be invested through several fund managers who will lend directly to British firms, with additional investment from the private sector and our share eventually returned to government.
But that still leaves half a billion, £100m of which will be invested in the kinds of schemes I’ve described. And, if we see quick take off I will certainly want us to invest the remainder as quickly as we can. Investments will be made over the coming months.
And, before I finish up and take some of your questions, I’m issuing a call to all of you today:
Tell us your ideal way to bypass the banks.
Tell us how to help rewire money to the small business world.
Because, yes, we’re rebuilding the banking sector to make it safe. Yes, we’re intervening to make the banks lend. Yes we’re supporting credit and investment ourselves.
But the missing parts of this puzzle are competition and diversity. So tell us what would work for you.