In the City
Industry at risk
Tony Rudd
The way that British industry is financed is one of the more crazy aspects of our already fairly unsatisfactory economy. Ideally, industry is meant to operate with long-term vision and catering for the needs not just of today but of tomorrow. How else can it plan for growth? The bulk of the money that it uses is on call, which is to say that the banks who lend it can ask for it back tomorrow. And if they don't get it they are entitled to move in on the business and take it over in order to get their debt repaid, if necessary by selling up the whole concern. It is a little difficult to comprehend why it is we run our affairs like this. Two obvious reasons stand out. First we have no corporate bond market in the United Kingdom and haven't had since interest rates climbed into double figures a decade ago. And secondly the rules governing the solvency of companies appear to be in grave need of substantial revision because as they stand they place the larger proportion of industrial enterprises in jeopardy.
So far as the corporate bond market is concerned the view in the City is that it will return once interest rates fall. It is very much to be hoped that it does. It will probably only do so, though, if the fall in interest rates is occasioned at least partly by a diminution in the proportion of savings being scooped out of the pool by the government. The very high public sector borrowing requirement and its consequent funding needs have undoubtedly crowded out the industrial borrower. If there is room in the queue he might be found there again. But it is doubtful whether this question of the level of interest rates is the whole explanation. The industrial borrower in the market has managed to survive through most of the trauma of rising interest rates in America these last few years. Admittedly there have been times when it has been extremely difficult to float an issue, but both borrowers and buyers have returned each time the market has regained its poise. As a source of long-term capital the US bond market has played, and doubtless will go on playing, an invaluable part in the finance of industry.
The second reason behind the financial instability of companies in the UK, the legal ability of the man who holds a debt payable on demand to insist upon payment or else, is a much more inhibiting factor on British industry than is often supposed. Basically well over half British industry could be bust tomorrow if the banks so willed it. Of course, for a number of reasons, they won't so will it. A fair proportion of industrial advances by banks are probably not recoverable at all but it wouldn't suit either the banks or their customers to admit it. This collusion is an important element in holding the two sides together. Secondly, the best way for a bank to get its money back from a doubtful customer is often to work with him rather than against him so that a solution evolves which is not too painful to either side. Thirdly there is a political factor involved; the banks know very well that for them to precipitate a wave of industrial closures would place them in a very unfavourable light. Their role in the finance of industry is continually under scrutiny by Parliament and is being particularly watched at the present time. The banks need to present an image of helpfulness and of underlying concern about the country's wellbeing in general and its rate of unemployment in particular.
However, allowing for these restraining motives, the situation does allow the banks, indeed imposes upon them, the role of arbiter; it is for the banks to decide whether this or that company shall be allowed to survive. They have continually to make judgments about the likely viability of their customers. It takes a great deal of skill by a banker to make the right choice. Some bankers are better than others in the same way that some industrialists are better than others. A good local manager who has built up a sound record of judgment and who is therefore well backed by his head office is more likely to make a sound judgment than, say, a new arrival, nervous of his position and carrying little weight with head office. The need for sound judgment is particularly important when an economy gets near to a turning point in the business cycle; the company which this month looked bust may next month get a flood of orders which it has been waiting for for months and suddenly be on the road to recovery. A bank that calls its overdraft too early will extinguish a number of potential recovery situations.
They order things better in America. For what is so bad about the British system is that the lender has the power of immediate execution. This is a weapon which he should never have in the first place. Under American bankruptcy law this weapon does not exist. The history of bankruptcy laws in the US is of a tussle between those who think that they should be tough and those who want leniency; the latter effectively won out and have imposed a system under which people or companies that can't pay debts as they are due are given the chance to reorganise their business, restructure their debts and, in effect, try to compound with their creditors. The existence of these arrangements (often known as Chapter Eleven Proceedings) gives businesses that are in trouble a haven to turn to. It means that banks and other short-term lenders think twice before forcing their customers over the brink because if they do so they don't get their money back the next day. Far from it: they may face 'Chapter Proceedings' which can take a year or more to work out. In the meantime they are locked in with no interest. It's a very healthy provision and has the effect of making the lender think twice before pulling the rug.
Perhaps the most important financial reform which could be enacted in the United Kingdom to the benefit of the health, over the long term, of industry here would be a revision of our arrangements and their replacement by some version of the American model. It is too long a subject to develop today, so we give warning that we shall be returning to the charge.
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