King attacks banks' ‘heart-breaking' treatment of SMEs

Governor of the Bank of England Mervyn King has attacked the way some banks are treating loyal business clients as "heart breaking".

He told the Treasury Select Committee existing lending agreements between the Government and banks were "not effective" because they set targets for gross lending, whereas "what matters is net lending".

In an evidence session to MPs. King revealed his frustration with banks which were failing to support economy growth, calling bankers' claims there was no demand for credit "not an adequate response". 

He said: "I meet many people who run small and medium-sized enterprises and the thing that really makes them angry is, having built up a business often over several generations and had the same banking relationship for 60, 80 years, then suddenly comes a letter churned out of a computer saying the terms of our relationship have changed and I have seen many of these."

"It is heart-breaking sometimes. It is a lot harder to build a business than it is to sit in London and trade away."

He called again on the Government to encourage new competition so that hard-pressed firms might have somewhere else to turn.

"If there are impediments in the current regulatory we should do our best to try to work through that," he said.

Mr King also raised the question for the Government to answer on the role of state-owned banks. 

The Chancellor, George Osborne, and the business secretary, Vince Cable, launched a Green Paper earlier his week on lending.

In it the Government backed the extension of preferential lending to SMEs, and threatened banks with penalties if they fail to provide loans to good businesses.