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McColl v Higgins in Battle of the Banks

Terry smiling headSo it’s Jim McColl against Benny Higgins in the Battle of the Banks. This mouth-watering contest is now firmly on the agenda as the billionaire engineering tycoon cranks up plans to build his own investment bank.

That pitches him directly against Mr Higgins, the former Tesco Bank boss, who is busy setting the ground rules for the Scottish government’s national investment bank.

Mr McColl insists his project will complement the government’s plans. However, it won’t be there just to make up the numbers.

Whatever shape these two banks take they will provide the potential for a new dynamic in the SME economy.

Mr McColl revealed his plans last month to a committee of MSPs inquiring into growth. He mentioned his bank project almost in passing as he listed his concerns over the effectiveness of the Scottish government’s network of advisory bodies.

He was also worried that the government’s own plan for a national investment bank would be “half-cooked” if it was run by civil servants following state aid rules that would ultimate tie-it up in the same red tape that restricts other state-run initiatives.

Mr McColl wants to provide a more easily accessible stream of capital to small firms which he feels are being starved by the high street banks, despite their claims to being more supportive.

They have certainly raised the funds available since the crash, though businesses maintain that the cost and terms of borrowing can be punitive.

Mr McColl is following a path pursued by other “challengers”, some of them emulating the traditional banks, others providing capital in alternative forms, such as private equity, venture capital trusts, crowdfunding and angel investing.

Is Mr McColl setting out to show the government, the banks and all these other providers how to do it?

Maybe. And there is no guarantee that he will succeed. However, his track record in reviving broken businesses and putting people back to work would mean that only a fool would bet against him.

Do interest rates really have to rise?

Turmoil in the world’s stock markets may seem to many businesses like something that happens to other people. Scotland’s army of small privately owned firms will look on aghast at estimates of $4 trillion of value lost in five crazy days of trading.

Of course, what happens on the markets impacts on the wider corporate sector and even the short-term madness of it all provides a crucial indicator to what is shaping the economy. Last week’s bout of selling points to underlying pressures caused, in part, by global growth.

The bottom line is that investors have woken up to the return of inflation, the imminent rise in interest rates and therefore the end of 10 years of cheap money. But is this also a little over-cooked?

There were early indications of this shift to higher borrowing costs when the US released growth figures a fortnight ago that prompted its central bank, the Federal Reserve to hint at higher interest rates. A similar expectation has been building on this side of the Atlantic, though it took on greater urgency on Thursday when the Bank of England’s monetary policy committee said investors should expect earlier and more frequent rate rises than previously forecast.

There is now talk of four rate rises in the next two years, the first in May, which will divide opinion on whether the UK’s Brexit-fearing economy is resilient enough to withstand such a quickening of the pace of change.

Whitehall’s ‘impact’ papers showed that Brexit will wipe 8% off GDP and there will be understandable concern that higher borrowing costs will cause further damage.

There are alternatives. The European Central Bank is still focused on its quantitative easing programme, and Japan’s central bank is keeping rates low despite one of its most sustained periods of growth for some years.

Mark Carney, the Bank of England governor, has sounded the rate rise alarm bell but has been vulnerable in the past to mistiming his alerts and was criticised by some for over-doing the dire warnings immediately after the EU referendum.

The Bank of England operates on a narrow remit, essentially controlling inflation, yet it is already at 3%, a full percentage point above the Bank’s 2% threshold.

If inflation is getting above itself then why has the Bank not taken more immediate action? That’s because it believes inflation may have peaked and will begin to return closer to the 2% target. As it is doing that without a rate increase, why is there still an expectation of a rate rise?

We saw last week what effect short-term thinking can have on global company values. It is also true that it takes only one or two well-placed sources to plant seeds of doubt for a spark to turn into a wildfire.

The result will be a few more days and weeks of market volatility and an almost certain rise in interest rates, whether justified or not.

 



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