While serving as founding chairman of the state-owned British Business Bank Ron Emerson got used to hearing sniffy comments about the notion of the UK having an economic development agency. “People said it wasn’t necessary and that it won’t work.” Then came the Covid-19 pandemic and a reappraisal of the agency — indeed, of the idea of state intervention more generally. “It did work and I think the government's very grateful that it’s there.”
Since the emergence of the virus, the British Business Bank has administered schemes that have provided tens of billions of pounds of emergency bank loans to companies, thrusting what had been a relatively obscure organisation into the spotlight. Mr Emerson, 73, its chairman from 2013 to 2016, expects it to stay there.
“The role of government in managing economies has changed dramatically. I think it is going to be a permanent state of affairs. People have said the government should stay out of things; that just isn’t going to be the way of things going forward. I don’t think we'll go back to how things were.”
Set up to address failings in small business lending markets, the agency provides wholesale finance for new banks and financial technology companies, underpins equity investments in start-ups and fast-growing companies and runs numerous government programmes aimed at supporting entrepreneurs. With structural issues in small business finance only going to become more pronounced in the economic downturn that comes with and will follow the pandemic, the British Business Bank is unlikely to be stepping back into the shadows any time soon.
Compared with other leading economies, small business investment in Britain is more heavily skewed towards debt than equity. It is also dominated by a banking oligopoly that Mr Emerson argues is increasingly disinterested in backing smaller companies. In his view, the centralisation of banking relationship management and credit systems in recent decades to reduce costs, moving staff away from the coalface, has worked for consumers and large businesses, but has failed entrepreneurs: “I was talking to one of the ex-chairman of one of the major banks not long ago and he said, ‘You know, this is all our fault. We’ve spent the last ten or twenty years deskilling the client interface’.”
Mr Emerson — a former senior adviser to the Bank of England, who received a CBE in 2017 for services to banking and small business finance — believes that this will be exacerbated by a “shutting of the door” to small businesses by big lenders as the fallout from Covid-19 affects both their loans and their capital strength.
“Small business lending was already an orphaned part of the bank. One bank chairman, who shall remain nameless, said, ‘Hey, look, if I’m gonna hold three times as much capital against [a small or medium-sized enterprise], as opposed to a mortgage, which business would you be in?’ SMEs don’t fit. They fall between consumers and big corporate and investment banking.”
Mr Emerson hopes to play his part in offering a solution with B-North, a prospective small business lender of which he is chairman and that is optimistic about securing a provisional banking licence within weeks. Its founders include Jonathan Thompson, a former Santander banker who will be its chief executive. Initially, it will offer secured loans of between £500,000 and £5 million. In its first year, Mr Emerson said, its systems would be tested under the scrutiny of the regulator, so lending volume would be modest, at about £50 million. However, it hopes to have lent at least £1 billion within four years.
B-North says that it will offer the rapid, technology-driven credit decisions of a financial technology business — it claims that it will be up to ten times faster than a traditional bank — along with a personalised service long since abandoned by high street incumbents. “If you ask a bank for a deal, it will take three to four months and it could be a ‘no’ and you have to start again,” Mr Emerson said. “I’m not sure how they fix that. It’s a product of legacy structures, both of systems and physical structures.”
He recalled a senior banker’s dispirited summary of what happened when his organisation hired consultants to try to speed up the loan application process. “After months of work, they managed to shorten it by two weeks. A few months after they left, it went back to where it was. It’s not easily fixable and new players are in a better position to change the structure.”
B-North, or Bank North when it secures a banking license, will take a decentralised approach, placing “core functions closer to the customer”, including relationship managers, underwriters and valuers, meaning that regional teams will have significant latitude to make their own decisions.
“The risk analysis [in credit decisions] has to be around knowing the players. You’ve got to look [borrowers] in the eye and ask, ‘Do they have the skill-set to take it to the next level?’ ”
The service plans to start in Manchester, but eventually it expects to have eight regional “lending pods”, each effectively a small bank in its own right.
In an era when there are scores of non-bank lenders for every banking start-up, Mr Emerson said that the cost and complexity involved in securing a license would pay off because it would make it easier to attract funding, and at a lower cost. “A lot of non-bank lenders are shutting up shop now because they can’t get funding.”
Is it not a scary time to be launching a bank? The answer is “yes. Whatever the market circumstances it would be scary, but we are very confident. We’ve got no legacy portfolio. The big banks will be working through theirs.
“We can pick and choose our business. We’ll be there when small businesses are desperate for funding while the big banks have shut up shop and the non-bank lenders have run out of funding.”
Levelling up the start-ups
One of the initiatives of the British Business Bank that Ron Emerson is most proud of is Start Up Loans (James Hurley writes). The scheme provides unsecured, low-interest credit of up to £25,000 to budding entrepreneurs.
“In the early days, 40 per cent of the borrowers were long-term unemployed,” he said. “The average loan was £6,500, so if you [got] off welfare for six months, you’ve paid for it. There was a real social consequence and it’s the kind of scheme that would only be delivered by the government.” While such economic intervention from the state has been contentious, Mr Emerson believes that the scale of the Treasury’s Covid-19 mitigation measures have changed the conversation. That, in turn, gives him hope of serious investment from the government in tackling the skew of government and financial services towards London — or “levelling up,” as politicians have called it.
Mr Emerson is involved in a research project on how moving political decisions away from London might help to boost regional productivity. “Hopefully, we’ll manage the pandemic eventually with vaccines and so on, but Brexit will be a permanent challenge. We need to get the country firing on all cylinders and right now we’ve got a major productivity divergence between the southeast and other regions. That has to be fixed.”
Along with moving political authority to the regions and investing in infrastructure, Mr Emerson believes that the potential of local small businesses must be harnessed if levelling up is to make a difference — and that means giving them more access to funding.
“We’ve had governments trying to find another Nissan to turn up and revitalise a region. It doesn’t work. If you look at Manchester and the way it’s regrown and revitalised itself, it’s pretty well through [smaller companies]. And if you look at the Industrial Revolution, that started with small businesses supported by local banks.”
Local Enterprise Partnerships, bodies set up by the coalition government to deliver more regional power, have provided little more than a good start, with their effectiveness often undermined by a lack of co-operation between them, Mr Emerson argues. They “kept everything too local. It’s fine looking at [one] city, but you have to trade with your neighbours. We need more lateral thinking.”