Charlie Elphicke MP: We need to reform the banks so they can finance the recovery

Seven Conservative MPs have teamed up with the Centre for Policy Studies and ConHome to propose ideas to turbo charge the UK economy. Yesterday, Jo Johnson set out how Britain should seek new business opportunities in emerging markets.

Charlie Elphicke is the Conservative MP for Dover and Deal.

Equity and debt finance matters to anyone who wants to see more jobs and money. Only with finance can businesses expand, innovate, conquer new markets and take on more people.

Yet the banks are not lending. It would have been far worse without the Merlin agreement. Even so, Bank of England figures show that £7.2bn more funds were recalled from business by banks than lent in the first half of this year.

Small businesses employing less than 250 people have been hardest hit as larger businesses are more able to access the funds needed for expansion from other sources. That is the most serious problem as over the past decade smaller businesses have increased jobs by 1 million while big business has shed 1 million jobs. We need urgently to see funds available to help smaller businesses expand as they account for half of our economy, are the job creators and can be expected to drive our future economic growth.

Small business equity finance
Many people think this is just about banking lending. Yet it is also about share investment in small business. The Merlin Growth Fund included a £2.5bn pot of cash. This is an opportunity. It could still be floated, pension funds and small investors could join in and expand it to a £5bn pot of cash. It could responsibly be leveraged four times. That would give you an economically game changing equity investment fund for small businesses of £25 bn.

Banking reform and increasing business finance
In the same way we might think a bit differently about the problem with the banks – particularly RBS and Lloyds.  Before the crash, these banks were run by empire builders who grew balance sheets that were too large for their base of depositors. So they turned to the wholesale debt markets to borrow money. That market locked up before and now they fear it will all lock up again. Banks have been made to increase capital at the bottom of the market and having done that are now faced with the Eurozone contagion. It's small wonder that banks are hoarding cash and fear to lend.

So we should deal with the underlying problem. The balance sheets of RBS and Lloyds are still too big and need to be smaller. There must be less reliance of the wholesale debt markets. The bankers will want to keep their empires intact. But we are paying for it all and they must not be allowed to stand in our way. The bad debts need to be disclosed properly to win back trust. To make things long term sustainable around £500 bn of assets – including things like Direct Line and Scottish Widows - need to be sold off. For assets that are hard to sell, we may even need to consider a national “bad bank” as some have suggested. Time is of the essence in turning things around as these banks are standing in the way of our economic recovery. Once cleaned up, made leaner, fitter and operating normally, RBS and Lloyds should be sold off as soon as may be.

Regulatory reform is important too. This should apply to all banks operating in the UK. In the last decade business lending barely increased in real terms while property lending went through the roof and drove the unsustainable asset bubble. There should be a regulatory incentive to lend to business. By the same token, there should be a regulatory penalty for reliance on the wholesale debt markets.

The taxpayer saved the banks. Now we should reform them so they provide the finance we need to make our economy grow faster.