A couple of blogs ago, I referred to a very interesting and revealing debate on funding which I witnessed at RESI 2012 last month, and that was the frank but stark assessment from the MD of Deutsche Bank Credit Structuring about the bank’s lack of ability to lend in the prevailing economic climate. This has made me reassess further what many have taken as a ‘given’, that the banks will return to lending in the future - though when that would be was a matter of debate, with anytime between eighteen months to five years being the common view. 

I do not believe, personally, that bank lending as we have known it will ever return and I genuinely feel that ‘now’ is the new ‘normal’ as far as the big banks’ approach to lending goes. What am I basing this on and, more importantly, what does it mean for the bridging sector?

The more obvious factors have been stated many times - scarcity of capital; ongoing concerns about the health of capital markets; and regulatory pressures. As well as this, you have a couple of factors that, while they are markedly different, are in fact two sides of the same coin and fall under the category of ‘culture’.

Since the beginning of 2009, there has been a massive about-turn which has seen a huge ‘deleveraging’ process and the establishment by some banks of a ‘non-core’ division to manage out billions of pounds worth of assets, by either running them off the books or through disposal. What this has meant in practice is that previously important clients, both investors and SMEs, have had term loans called in at short notice and long standing lending facilities have been terminated. This has been a huge shock to the system as both banks and clients alike have come to terms with being weaned off an addiction to debt that had previously existed for decades. Like any addict, being treated with cold turkey only, the effect has been traumatic. 

This new orthodoxy is all-pervasive when it comes to lending in the current climate. Nearly every bank will do a ‘no risk’ deal, but that still excludes the vast majority of cases. The approach to lending prior to 2008 had developed over years when lending had an intrinsic value to banks; this is no longer the case, hence the current approach, and the longer this continues, the more culturally embedded it will become in the banks themselves.

The other side of the cultural coin, and just as important for banks, is that of perception – both by the public and by the banks themselves. Barclays new CEO Antony Jenkins has already stated his intent to change the culture to “restore Barclays’ reputation”. Meanwhile, at RBS, Stephen Hester has admitted that it could take a generation to change the culture of banking. What does this mean for businesses who have previously relied on bank funding to grow? The omens aren’t good.

Changing a culture in any institution or company, especially given the size of the two mentioned above, involves a huge amount of internal analysis, which can turn into navel-gazing very quickly. As this angst continues, well documented issues such as PPI and LIBOR fixing are giving way to new ones – the FSA has estimated that up to 40,000 interest rate swaps could have been mis-sold to small businesses by their lenders, an increase of about a third from their initial figure of 28,000. Some estimate that the overall cost to the banking industry at more than £10 billion, making it potentially more costly than PPI. A state of flux, therefore, looks set to continue for some time.

This environment is one where alternative forms of finance, such as bridging, are an integral part of the new ‘now’ and we have two trump cards over other parts of the UK lending market: funding and flexibility. Future clients are waking up to the fact that existing banking relationships now count for nothing and brokers have a huge opportunity to sell access to short-term funding to those newly marginalized investors, developers and all manner of small businesses and it’s one we as an industry should grasp. 

As an old schoolmaster used to say, “carpe diem” - he was right, you know, because we’re a long time gone.