DESPITE the stance adopted by Theresa May’s Government after the recent round of talks we cannot be too optimistic about the potential range of outcomes. The potential for a “disorderly Brexit” remains but now the banks can cope with it, says Bank of England Governor Mark Carney.
Attempting to instil confidence, banks have recently passed stress tests which include a 33 per cent fall in house prices, a rise in interest rates from 0.5 per cent to four per cent within two years and an increase in unemployment from its current 4.3 per cent to 9.5 per cent. But what planning are the banks doing for business customers they support? With no formal “duty of care” to their business customers how might a “sharp” Brexit restrict their ability to fund new money or maintain existing loans to business?
It’s clear that the banks will have a requirement to ensure their own balance sheet remains strong and they must also meet and pass tests as to how much cash reserves they hold. But in the heat of battle decisions must be made. Those small businesses which were trading after the financial crisis of 2008 recall the limitations to how they could invest or grow their business and, in the worst case scenarios how sudden decisions to withdraw from certain sectors saw business failures spilling over into communities: to jobs, livelihoods and families.
Our most recent research has confirmed that, even before Brexit is a reality, bank net lending to small and medium-sized enterprises (SMEs) has been collapsing.
Often SMEs are the ones that are taking the risk in innovation, or in developing new technologies – but in times of recession these types of businesses are often turned away by mainstream lenders when they should be regarded as even more vital to raise productivity and grow the economy out of a downturn.
If banks are stress testing their own businesses, how then are business customers stress testing theirs and working out what they should do? Our interim report, Brexit & Scottish Business, reveals that many businesses are still failing to undertake even the most basic planning for an orderly Brexit never mind the disorderly Brexit that is actively being considered by banks. Business owners cite “uncertainty” as to why they are failing to plan, with some living in the blind hope that Brexit will not take place at all.
Some businesses are taking advice on what to do. That advice is mostly being sought from Government agencies or from business bodies such as the CBI, the Institute of Directors, the Federation of Small Business or their local Chambers of Commerce. Ironically, it is the banks themselves that are being consulted the most infrequently with lack of trust in banks being a prime factor.
Thus, business is often not planning, banks are planning only for themselves and the Bank of England is actively conceding there could be “economic pain” for business and households. “Fail to plan – or plan to fail” is the mantra by which all business, regardless of sector or scale must live. For now that might mean stockpiling cash, ensuring credit lines remain secure and so forth. Diversification could be considered by some. Price rises in supply chains could be modelled to ensure sufficient profit is baked in.
This is a time for action particularly for the small, inexperienced or exposed businesses that have the lowest capital reserves. Businesses no less than banks need to be able to cope with a “disorderly Brexit”.
The uncertainty and lack of planning in business presents both the UK and the Scottish Government with a major policy challenge. Government, too, must take action to support business. As with business, to do nothing would be to invite failure.
Source: Herald Scotland