British small businesses are being allowed to borrow from banks at less than half the rate they enjoyed before the financial crisis, and one of Donald Trump’s economic advisers says the fault lies not with the crash of 2008 but with the laws behind it.
Tyler Goodspeed, who chaired the White House’s council of economic advisers from 2020 to 2021 and is now chief economist at Exxon Mobil, says that post-crisis regulation that forced banks to hold more capital, rather than the depth of the recession, is the main reason Britain has recovered behind the United States.
“For 15 years, British policymakers have been telling themselves that gradual recovery was just the price of a deep recession. It’s not,” Goodspeed said in a paper for the Free-market Institute of Economic Affairs.
“History shows deep recessions are often followed by strong rebounds. Britain’s experience after 2009 abandoned this pattern because regulators, with good intentions, made it harder for banks to lend to British businesses. That was a choice, and it still is today.”
His average figure will kill any owner who has set up a bank to raise money. Credit to small businesses in the United States returned to 2008 levels in 2013; in the UK it remains 15 percent below pre-crisis volumes. Britain’s lenders, he says, have withdrawn from the real economy and instead switched to “low-risk lending to governments”.
The consequences are most severe for very small, ambitious firms, which the government keeps saying it wants more of.
“This is important because small, small businesses looking to grow may struggle to get credit through bank loans because they don’t have a credit history and tangible assets to use as collateral,” said Goodspeed. “To illustrate this point, one may consider technology companies, whose primary assets are intangible, that is, their ideas. Without non-bank credit sources, many such firms may not be able to obtain external financing, and instead be forced to rely on cash flow and retention.”
That dependence is sharper here than across the Atlantic. UK firms are more dependent on bank funding than their American peers, who can tap deeper capital markets and pools of private debt, private equity and venture capital. If the bank says no, many British SMEs have nowhere else to turn.
The picture painted by Goodspeed will be seen by Business Matters readers. Ministers have already pulled in the leaders of major banks to discuss reducing access to credit, and the government has launched a review of the provision of SME credit. The high street retreat left challenger banks holding 60 percent of the SME lending market, a share that was unimaginable before the crisis.
Goodspeed’s decision is wrong. The decline in bank lending to firms “is a burning case for UK financial policy over the past 15 years. Before 2008, approval rates for new bank loan applications by UK small and medium-sized businesses used to be 80-90 per cent. By 2024, that had dropped to less than half,” he said.
Some of the post-disaster buildings are now being demolished. The Bank of England loosened the rules on bank bonuses and signaled that it would relax the capital requirements for lenders, the securities and assets banks must hold against their lending. The former Labor government, under Sir Keir Starmer, said it would further loosen post-2008 “lock-in” rules that forced banks to separate retail banking from riskier investment work, a change the industry has long demanded.
Whether the looser rules translate into more loans to expand existing stores or software startups remains an open question. At Goodspeed, the direction of travel is more important than the acceptance under it: that Britain’s debt drought is taking place in Whitehall, and can be done there.
