The City Will Never Fund Small Business. The Government Must.

Two headlines landed in my inbox from the same financial newspaper on the same morning, and read together they tell you everything you need to know about how Britain misunderstands its own economy.

The first announced that a package of financial reforms was set to deliver a boost to the City of London, with the government championing the Square Mile as a driver of national growth. The second, buried lower down, reported that bank lending to British businesses had weakened sharply — with feeble economic growth and tighter regulation blamed for choking off credit to small and medium-sized companies.

Here is the truth the second headline tries to disguise with the word regulation. There has been nothing — no rule, no regulator, no edict — that has prevented British banks from lending to small businesses over the last three decades. To blame the rulebook is to invent a villain so that the real one can keep its reputation intact.

The real reason the City and its banks have walked away from small business is far less flattering. They walked away because the work is hard. Lending to a small company is not a spreadsheet exercise you can run from a screen in Canary Wharf. It requires understanding, relationships, monitoring and partnership — and a belief that creating value matters more than extracting it, a belief that has been quietly bled out of British finance over a generation.

Both the ability and the willingness to lend to small business have gone. The banks no longer have the people who know how to do it, and rent extraction is so much easier than partnership.

01 / The slow death of relationship banking

Forget the year-to-year noise about whether lending ticked up or down last quarter. Look across a generation, and the structural collapse is impossible to miss. According to research published by the challenger bank Allica in 2025, the share of small firms even applying for finance has fallen from around 65% in the late 1980s to just 25% in 2022–24 — among the lowest application rates in the developed world. The overdraft, once the lifeblood of the corner-shop economy, has been gutted from £18bn in 2000 to a mere £2.7bn today. Allica estimates the resulting structural credit gap at up to £65bn.

And here is the cruellest part of the story. Almost no banker at work in Britain today actually understands what small-business banking means, because they have not been around long enough to learn it. The branch where a manager knew the local butcher, the garage and the family-run engineering firm by name has been bulldozed. When a town loses its last branch, research by Move Your Money found, the growth in small-business lending in that postcode can fall by more than 100% — lending actually goes into reverse.

02 / The productivity puzzle isn't a puzzle

When the grand columnists of the financial press lament Britain's productivity collapse, they tend to blame politicians — childish, short-termist, incapable of seeing past the next election. But the productivity crisis is not the work of infantile politicians. It is the work of infantile bankers, and of the infantile neoliberal dogma to which the financial press itself so devoutly subscribes.

The mechanism is not mysterious. Productivity rises when businesses invest — in machines, in premises, in training, in technology. Investment requires capital. And Britain, uniquely among its peers, has spent thirty years refusing to supply it. The downstream consequences show up daily in the markets we cover on forex, indices and UK stocks — a structurally weaker sterling, a FTSE that lags its peers, and gilt yields that punish the Treasury rather than the City (see The City Is Holding Britain Hostage).

So what can be done? My answer is: precisely nothing, until the government grasps a single uncomfortable fact. The City is not a solution to any known problem in the British economy. The City exists to extract value from the rest of us. It has no real interest in creating it — and that is as true of the banks as it is of the senior management of nearly every quoted company in the land, whose energies go into financial engineering and shareholder returns rather than the patient business of building things.

03 / The glut we pretend is a shortage

Britain does not have a shortage of capital. It has an excess — a vast, sloshing glut of savings doing nothing useful at all.

There is more than £870bn saved in Individual Savings Accounts, with the market now closing in on £1 trillion. Of that, around £360bn sits in cash ISAs — earning a return that, after inflation, is frequently negative, and financing precisely none of the productive economy. The single most damning statistic in British finance is this: our pension funds now allocate just 4.4% of their assets to UK shares — down from over half a generation ago.

04 / Cut out the middleman

The only sensible answer is to bypass the City altogether. The government should create a network of regional investment banks, funded by government-backed bonds carrying a state guarantee — the same kind of guarantee that already stands behind ordinary bank deposits. New ISAs, and a portion of pension contributions, should be required to flow into these instruments. The saver gets a safe, government-guaranteed home for their money. The region gets patient capital. The middleman, and his margin, simply disappears.

If this sounds radical, it is nothing of the kind. In 1945, the Bank of England and the major clearing banks together founded the Industrial and Commercial Finance Corporation, created specifically to plug the gap in small-business finance. By the 1990s it had backed thousands of companies. Then it was floated, renamed, and reinvented itself as a private-equity giant. Britain built the cure, and then dismantled it for profit.

Other countries did not make the same mistake. Germany's KfW refinances local savings banks, channels tens of billions into its Mittelstand every year, and has been ranked the world's safest bank for sixteen years running. France runs Bpifrance to the same end. Each invests roughly one per cent of national GDP into its productive economy annually. Britain's equivalent efforts remain a fraction of that scale.

05 / The choice

None of this is abstract. Small and medium-sized firms are not a sideshow to the British economy — they very nearly are the British economy. There are around 5.7 million private-sector businesses in the UK, and 99.8% of them are SMEs. Together they employ around 16.9 million people — three out of every five private-sector jobs — and turn over some £2.8 trillion a year.

These are the firms that deliver local jobs, that take on the school-leaver and the apprentice, that provide the real training — the kind that happens on a workshop floor, not in a graduate scheme — on which a productive economy is built. Funding them answers almost every need this country currently has, in a way that big business, forever chasing the next buyback, never can. But without capital, they can do none of it.

When is a grown-up politician finally going to make the right choice?

The capital exists. The savings are sitting there, idle, by the hundreds of billions. The model has been proven abroad and was, once, proven here. All that is missing is a government willing to stop pretending that the City will ever do this work — because it never will — and willing instead to build the pipes that carry the nation's money to the people who would actually put it to use.

Until that day comes, we will keep reading those two headlines side by side: a boost for the Square Mile on the front page, and the quiet starvation of the real economy somewhere further in. It does not have to be this way. We are not poor in money. We are only poor in the will to direct it.

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Further reading on this site

For the companion essay on how the gilt market itself is engineered, see The City Is Holding Britain Hostage. For the practical side — how this macro backdrop shows up in sterling, indices and rate-sensitive markets — see our pages on forex, indices, commodities and UK stocks. If you trade these moves, our guides on developing a trading strategy and how to backtest in MT5 translate the macro into a repeatable process, while the great migration from forex to futures prop firms and how prop firms detect algorithmic trading in 2026 cover the funded-trader angle. Ongoing macro is tracked on trending topics.