A LEADING finance expert has urged the creation of smaller local banks to tackle the shortage of lending to small businesses.
Speaking at a joint Federation of Small Businesses in Wales and Institute of Welsh Affairs conference on the subject of alternative finance for Welsh micro-businesses Professor Richard Werner, director of the Centre for Banking, Finance & Sustainable Development at the University of Southampton, contrasted the situation in the UK with examples from Germany and the US.
He said that banks had a special place in the economy, because through the granting of credit they were able to create money.
But he noted that where the money ended up had a major impact on the wider economy.
"Their decisions about who gets the money will, in a short time period, reshape the economy - whether it's to productive small firms, big projects or financially speculative loans," he said.
Professor Werner made a distinction between three forms of bank lending.
He highlighted investment credit - bank lending for activities which supported GDP, such as loans to small firms creating goods and services as being beneficial.
But he warned that large banks tended to put their money into consumption credit - funding consumer spending, and financial credit, which allowed speculation in markets such as property, leading to the creation of asset bubbles.
Explaining the latter, he said: "The gains created there are based on capital gain. It's effectively a Ponzi gain. The early investors will make the money and those that get in late will lose the money."
He noted that large banks, such as the five big high street banks in the UK, had been driven by profit motives to provide larger loans to financial institutions for quicker returns, rather than putting the same money into smaller firms which would create more economic growth. …