Within the European Union the dominance of bank lending in the financing of small and medium sized enterprises (SMEs) is well-observed. However, in one country, the United Kingdom, exactly the opposite is the case. In the UK most SME funding is via bank overdrafts and credit cards.
Although it might be assumed that the roots of this significant difference lie in the historical, institutional, political, and cultural structure of the British banking system or in parallel explanatory factors in the UK SME population, the real mystery is why, since the nineteenth century, there appears to have been no significant change in British banks’ attitude towards providing long-term loan finance to SMEs. Indeed this “risk aversion” might have been expected to alter during the post-Second World War period and the substantial expansion of consumer demand and expanded commodity production, but it did not. One contributory factor, which will also be explored in relation to this latter period may be the adherence of the UK to a liberal market economy structure.
This book explores not only how the initial starting conditions forming the British banking structures during the industrial revolution produced a relatively risk-averse structure in the UK, compared to the other European countries and the US, but also why the relatively risk-averse business banking attitude of British banks has persisted to the present day. The book also suggests the changes which will be required for British business banking to provide a more balanced mix of financial provision to SMEs.
Michael Lloyd is a Senior Research Fellow at the international affairs think tank, the Global Policy Institute, and a visiting fellow at Newcastle University. His books include The Euro and the UK (2009) and Federal Central Banks (coauthor) (2018).