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Project Merlin

12th December 2011 in Current Affairs

As part of the Project Merlin agreement between the government and our (and I use the possessive advisedly …) high street banks which was launched in February, the latter pledged to lend £190bn to businesses this year, £76bn of that to SMEs. Well, let’s be a bit more accurate: what the banks actually agreed was that they would demonstrate a “capacity and willingness to lend” those amounts, a somewhat different thing - making credit available at a price or on terms which are commercially unattractive for the borrower may help the bank meet the target but will presumably do little help the business or indeed the economy.

Anyhow, putting aside for now this little wrinkle in the scheme, and despite (on the occasion of the release of a Q3 progress report last month) some high quality attempts to spin the success of this part of Merlin and present the figures in the best possible light, it now seems generally agreed that the banks have or will fail to meet the hurdle, and certainly the SME part of it. Indeed no less of a lending authority (!) than Citigroup has apparently made some fairly damning statements about the scheme, even suggesting rather strikingly, that

“… the cost and availability of credit for small firms will remain poor unless the government take [sic] a far more proscriptive and forceful approach to the banks (e.g. running the nationalised banks on non-commercial grounds, ordering them to lend more to small UK firms at low rates, and if necessary changing the management to achieve this)”

Perhaps the notion that the whole thing was nothing more than “a PR trick”, as a Telegraph headline on the subject has it, will not come as much of a surprise to the cynics, or to those of us involved with Foundation East (FE) which has worked for some years at the coalface of small enterprise lending. But one of the principal excuses that the banks (and indeed the government) have had up their sleeve to combat the inevitable backlash that has followed the recognition of the scheme’s failure does actually strike a chord with us here – that there is a lack of demand for lending. Okay, as mentioned above, demand is (pretty famously in fact…) a function of price, but nonetheless over the past weeks and months we here have repeatedly come across, or raised, much anecdotal evidence that there has been a significant downturn in risk appetite in our target sector.

My thoughts on this subject intersected last week with aspects of what I had been learning about the work of the psychologist Daniel Kahneman via the swathes of coverage granted to his recently published
“Thinking, Fast and Slow”, an extensive and apparently very readable collection of the insights and conclusions of a life’s work in his field. Whilst he sounds like one hell of a guy and a very interesting thinker, I confess to being a little skeptical of some of these, including one about attitudes to risk and money, précised by the Guardian as follows:

“… we hate losing things more than we like gaining them … if forced to choose between being given £500 for certain, or a 50% chance of winning £1,000, most of us will opt for the sure thing. But if the choice is between losing £500 for sure, or a 50% chance of losing £1,000, most of us will take the gamble.”

Not so sure about that myself. In other reported versions of the test a lower-risk proposition is used – e.g. here (at 5.), a 90:10 scenario - and in that case I think the emboldened assertion above is more tenable. My quibble is that this ‘prospect theory’ to give it its name, is said to “[debunk] Bernoulli’s utility theory … that a person’s willingness to gamble a certain amount of money was a product of how that amount related to his overall wealth” – for me it does no such a thing as I’m pretty sure I can elicit a different answer from the same person if I change only the amount of money in the quoted example. In all probability however, were I not such a lazy dilettante, and was I therefore to make even a cursory study of the actual theory (as can be done here) rather than relying on the reports of journalists, I would no doubt discover that it is both much more sophisticated than this, and also correct – Kahneman did after all win a Nobel prize, in part for this work.

Right or wrong, we at FE hope that potential borrowers out there will not lose their nerve completely and that when they see an entrepreneurial opportunity for gain, they will steel themselves and take the risk; we’ll be ready to help.

David Bell, Director

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