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Add competition to the banking sector to boost lending

Setting banks business lending targets is not the way free up credit for firms, a business group has claimed.

The way to increase the amount of money loaned to small firms is to ramp up competition among lenders, the Federation of Small Businesses (FSB) insisted.

That means more banks that specialise in dealing with businesses.

It is more than ten years since the Cruickshank Report advocated greater diversity within the banking sector, yet in that time the number of banks in the UK has fallen by 20 per cent. 

Data from the last 10 years of British Bankers Association Abstract of Banking Statistics has revealed that there were 420 banks that could take deposits in 2000. In 2010, this figure fell to 332, the FSB said.

Back in 2000, the four main high street banks had an 83 per cent share of the small business market. Because the proportion of UK banking groups and their subsidiaries has reduced by 46 per cent in the last decade, those main four banks now hold 85 per cent of the market. 

The FSB believes that the proposal of the Independent Commission on Banking (ICB) to separate the investment and retail divisions of banks will help small businesses to get a fairer deal. 

However, while structural change is needed to prevent another 'credit crunch', more competition will be vital for the long-term future of the economy. 

In order to promote competition, the FSB wants the ICB to recommend a number of policy measures.

Any moves to force the state-owned banks to sell off more branches than the EU Commission recommends should be used to help new entrants, the FSB argued.

Small and new banks should not be penalised under regulations which require them to hold more capital.

Financial regulators should look at shared services that will help new banks to provide a branch network. The Post Office network could be one solution.

And finally, the newly created Financial Conduct Authority must be given the powers to investigate and recommend policies which focus on increasing competition.

John Walker, the FSB's national chairman, said: "Not only are there fewer bank branches on the high street, but there are also fewer banking groups.

"The lack of competition in the sector is the most important thing that the ICB should focus on in its full report in September. The lack of competition gives small businesses less choice, and it also means that the cost of finance is more expensive. 

"Allowing new or even specialised banks to buy branches from the state-owned banks would boost competition on the high street; helping to drive down costs and gives the smallest of businesses a fairer deal."