Unproductive SMEs, Personal Guarantees and Bonuses

  1. Banks create money when they issue a loan to a client.
  2. That money only exists in the bank’s and the client’s books.
  3. The current rules of creating money encourage and incentivise banks to create money. They only make money on the spread between their asset book and their liability book. Because of state deposit guarantees and the Central Banks lender of last resort, people and businesses are happy to accept almost zero interest to hold their money in banks. Without government backing, banks would need to offer depositors a much higher interest rate. If this was 2% then the effective subsidy to UK banks is ~30bn pa (i.e. 2% * 1.5 trillion of ‘sight deposits’)
  4. The client agrees to the terms of the loan, which are prepared by the bank.
  5. In many cases, the client is not able to get the loan without signing a ‘Personal Guarantee’ (PG). A legal definition of a PG can be a “blank cheque” (presumably limited by the amount of the loan).
  6. The client is signing over his own personal assets to guarantee the repayment of the created money.
  7. The client often has little understanding of what he is signing, nor does he enjoy good, relevant legal advice.
  8. What he is signing is a contract based on the created money.
  9. In many cases, this contract states the bank can call on this loan on demand.
  10. This on-demand call will trigger the PG. In a high number of cases, the Secured Lender goes straight to the Guarantor for repayment of the loan.
  11. Bankers are incentivised by bonuses to operating this churn.
  12. This money goes to the bank`s profit and bonuses for bankers are paid on profits.
  13. The banks create money by this process and the client loses the assets used as guarantee collateral.
  14. Any litigation is brought under Contract Law focuses only on the contract signed between the client and the bank. The banks are clearly experts in this area, and anyone attempting to bring an action against the bank faces the might of the bank’s unlimited access to funds, legal experience and ability to delay. Essentially, banks have both the incentive and resources to fight battles that they may win simply by being able to argue for longer.
  15. The banks use top branded firms to convince the courts of some peculiar accounting practices. The Courts in that sense are exposed to experts. Introduction to intercompany debt – concept: youtube.com/watch?v=lD-sxnjNdjs
  16. As a result of this practice, which started in the 1990s, many SMEs are no longer seeking bank borrowing to fund research and development. SME loans have been falling since the financial crisis. Using the data on https://www.bba.org.uk/news/statistics/sme-statistics/bank-support-for-smes-1st-quarter-2017/#.WZ7tHCiGPD4we can see that bank lending to SMEs over the last five years has been a net negative, falling by ~10bn since 2011.
  17. Funding research and development is, by definition, a risky business.
  18. The practice of banks channelling credit into non-productive uses (e.g. mortgages for pre-existing houses) rather than productive uses (e.g. to SMEs to fund investment and R&D, that creates jobs, and increases the economy’s supply potential) may be one of the reasons why SME borrowing has reduced and why the UK is falling behind other parts of the world in productivity.


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This blogpost is for information purposes and should not be relied upon as legal advice because it does not consider or take into account your own personal circumstances. If in doubt, seek legal advice.