We need to know exactly how our new bank will lend

The election campaigns were in full flight last week so we should not be too surprised that the Government jumped the gun on announcing its new bank. But that said, the amount of detail that was available about this new €5 billion institution was amazingly scant.

This is what we know.

By the end of the year the Government will have established the Strategic Banking Corporation of Ireland (SBCI). Legislation to set up will be enacted this summer, TD's holidays permitting, we presume.

The bank will have €500 million to lend, which will grow to €800 million by the end of the year. In five years it will be €5 billion. The initial money will come from the German state-backed business bank Kreditanstalt fur Wiederaufbau or KfW. The European Investment Bank and the Irish Strategic Investment Fund will also provide funds.

The new bank will be modelled on KfW and provide loans to small and medium business on longer and more favourable terms than are currently on offer from Irish banks, or were ever on offer from Irish banks even in the pre-crash days.

The availability of this sort of long-term finance – loans of 10 years are common – is one of the factors behind the success of Germany’s Mittelstand and, by extension, its export economy. Mittelstand companies tend to be small, family owned and focused on doing one thing exceptionally well and exceptionally competitively. This in turn has led to great success in export markets. This is what we don’t know, and probably need to know before we get too excited about the prospect of an Irish Mittelstand:

How exactly will the new bank lend? We know it will be via the existing banks but its not clear if they be, in effect, brokers, bringing customers to SBCI or will SBCI be providing them with money to lend on to SMEs as they see fit.

The reason this is important is that there have been quite a few initiatives based on the second approach over the past few years which have not had any discernible impact. They certainly have done nothing to still the clamour emanating from the SME sector about the lack of available finance.

Impact diluted

The reasons for this are many but ultimately it is because the impact of the money is diluted. Again this is for many reasons, not least because the amounts of money involved – while substantial in their own right – are relatively small in comparison to the banks existing SME loan books.

But also, once the money goes into the pool, it is very difficult to track what ends up as new lending and what is simply used to refinance and restructure existing borrowers. When you then consider that the banks have been husbanding capital for the last five years, you realise how inefficient this route has proven in terms of getting money to SME’s.

It would appear that the SBCI is going to operate in this fashion, but perhaps with some modifications. KfW will apparently make it a condition of it its loans to SBCI that the money can only be lent to SMEs. Presumably this will be the official EU definition of a company employing between 10 and 25 people and a balance sheet of up to €43 million.

Potential

However, the potential for the KfW money to get lost in the wash of the existing bank SME lending seems high and needs to be addressed if the maximum impact is to be gained from this low cost, long-term money.

If the objective is to try and grow our own Mittlestand, the first thing that has to be accepted is that this money is not for everybody and needs to be kept separate. It is for companies that have been identified as having the potential to thrive in export niches.

You would have to question whether this job is best left to the existing banks. They have existing relationships which will cloud judgment and their skills in this area were degraded by the “rack ’em and stack ’em” approach to lending that was ubiquitous in the boom.

The preferred option is for SBCI to lend directly to SMEs, which is the model employed by KfW. If the Germans are prepared to give us their money, they should in theory be prepared to share their expertise in picking Mittelstand winners with the new Irish bank.