They stand in stark contrast to the operations of regional banks in France, Germany and Italy, which have supported small firms and played a fundamental role in the promotion and growth of local economies.
What's more, this deficiency in the British financial system has had a damaging impact on the potential for regional economic regeneration and improved national economic competitiveness.
Dr. Carnevali's examination of the lending practices of Barclays, Midland, Lloyds and NatWest shows that two types of failure have occurred:
- First, despite being the only source of finance for the majority of firms, the commercial banks have failed to develop internal structures suitable for reducing the costs involved in lending to them. The centralised structure of the banks makes the cost of assessing and monitoring loans to small firms too high, in relation to the returns, thus leading banks to ration credit to this category of potential customers.
- Second, there has been an absence within the British capital market of institutions whose internal structure is more suited for dealing with small firms, such as the regional banks found on the European continent.
- In addition, there has been a persistent bias against small firms in the political establishment. The research shows how successive British governments have been aware of the structural deficiency in the British capital market but have ignored it as political forces have equated economic success with large-scale organisations.
- To a certain extent, small firms have been able to devise strategies to satisfy their demand for funds (by resorting, for example, to hire purchase). In the long run, however, the bias against small firms has had a negative effect on their investment capacity, with a potential impact on the country's economic competitiveness.
Dr. Carnevali has also looked at banks and small firms in France, Germany and Italy. Her research shows that an integral element of the competitive advantage of continental European regional economies in the second half of the twentieth century (and beyond) has been the existence of a healthy small firm sector.
Previous research on regional economies in Europe has concentrated on the productive capabilities of networks of small firms in industrial districts. But this research has an entirely new focus. Comparative analysis shows that regional banks in continental Europe played a fundamental role in the growth of local economies. In contrast, British commercial banks have been unable to take on this role.
Francesca Carnevali commented:
'At a time when one of the most pressing policy issues facing the government is how to promote regional economic regeneration, these findings raise critical issues about the long-term failure of Britain's banks to support the small businesses at the heart of local growth.'
For further information: Contact Dr. Francesca Carnevali on 01-21-414-6635 or email: carnevaf@hhs.bham.ac.uk Or Iain Stewart, Lesley Lilley or Anna Hinds at ESRC, on 01-793-41-3032/41-3119/41-3122.
NOTES FOR EDITORS
1. The research project 'Europe's Advantage: Banks and Small Firms in Europe and Britain' by Dr Francesca Carnevali was funded by the Economic and Social Research Council (ESRC). The full results of this research project will be published as a book by Oxford University Press in 2004. Francesca Carnevali is in the Department of Modern History at the University of Birmingham.
2. The ESRC is the UK's largest funding agency for research and postgraduate training relating to social and economic issues. It provides independent, high-quality, relevant research to business, the public sector and Government. The ESRC invests more than £76 million every year in social science and at any time is supporting some 2,000 researchers in academic institutions and research policy institutes. It also funds postgraduate training within the social sciences to nurture the researchers of tomorrow. More at http://www.esrc.ac.uk.
3. REGARD is the ESRC's database of research. It provides a key source of information on ESRC social science research awards and all associated publications and products. The website can be found at http://www.regard.ac.uk.