Banks block £1bn fund for small business

Published 18th Dec 2009

Several City institutions are still to release money meant for small businesses


Investment banks upset over the Government’s attacks on City bonuses are holding up a £1 billion fund for small business. Some high street banks are also stalling over claims that the fund is being created to boost Labour’s chances at the next election.

The tension between the banks and the Government over the Treasury’s windfall tax on bonuses came to a head in the run-up to the Pre-Budget Report last week. The Chancellor had been expected to announce a significant contribution to the fund from a number of top investment banks operating in the City.

Gordon Brown announced plans at the Labour conference in September for a National Investment Corporation (NIC) to support small businesses struggling to obtain lending from commercial banks. It was intended to have £1 billion of funds to invest in its growth fund, £200 million of which was to come from eight overseas investment banks operating in the City, said to include Citigroup, Goldman Sachs and Morgan Stanley. Each was to have contributed £25 million.

After leaks of a proposed windfall tax on City bonuses began appearing in the press before the PBR was announced, however, the investment banks had what one Treasury insider described last night as cold feet.

The Treasury met the banks on Wednesday with the intention of persuading them to commit themselves to contributing to the NIC’s growth fund. It is thought that no agreement is likely before Christmas. The only high street banks to have signed up so far are Lloyds Banking Group and Royal Bank of Scotland, which are respectively 43 per cent and 84 per cent owned by the taxpayer. Both have agreed to stump up £100 million each.

The other two of Britain’s big four clearing banks, Barclays and HSBC, have yet to commit. The Treasury confirmed that Standard Chartered, whose chief executive, Peter Sands, played a crucial role in drawing up the blueprint for the rescue of Britain’s banks in October last year, has declined an invitation to contribute £25 million. Standard Chartered, which specialises in lending in emerging markets, is understood to have told the Treasury that, since it does no British lending, it would be inappropriate for it to take part.

Barclays and HSBC’s concerns are said to centre on what structure the NIC will take. The fund was originally intended to be modelled on the Industrial and Commercial Finance Corporation, a body set up after the Second World War to help small businesses, which later evolved into 3i, the private equity firm.

But the two banks are understood to be worried that the fund could end up being state-owned, with the risk that its resources could simply be poured into marginal constituencies before the general election, or will operate as a “fund of funds”, which would see a significant proportion of resources being diverted to fund managers instead of to small businesses.

A spokesman for Barclays said last night: “We are still thinking about it. We are looking at the proposal that was put to us. We are neither in the ‘committed to’ camp — as are Lloyds and RBS — or the refusenik position of some others.”

A spokesman for HSBC added: “We continue to work with the Government and we are doing so constructively. We are waiting for the Government to come up with a decision on how the fund will operate.”

A spokesman for the Treasury said: “We have had constructive discussions with the banks and we are still working to nail down the final decisions. The only ones not contributing so far are Standard Chartered.”

Source: ' Times '

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