DO LARGE BANKS FINANCE BIG COMPANIES?

DO LARGE BANKS FINANCE BIG COMPANIES? Another answer to Mary Jane’s question is that lending to large businesses is not a very important part of the business of the biggest banks. This blog post by John Kay (which appeared in the Financial Times on September 14) sheds light on the issue for the United Kingdom. Kay says that while bank loans are very important for small and medium-sized British businesses, British large businesses for the most part rely on cash generated internally to fund investments. Some surprising numbers: Lending to UK businesses was only about 3% of the total assets or liabilities of British banks. Kay says that “…most of the £6,000bn total of UK banks’ assets and liabilities represents financial institutions trading with each other.” Kay concludes that the banking structure that has emerged “can be viable only with far greater capital than banks traditionally held – or can raise.” The reason he gives for the difficulty in raising capital (increasing shareholding) is that in the last decade bank shareholders have done very badly while the people running the banks “became very rich.”