Notwithstanding the historical and cultural context which defined the British business banking functionality in the nineteenth century, an explanation is required as to the persistence of the poor record of British banks in providing sufficient investment loan capital to SMEs in the twentieth century, and to the present day. This chapter will seek explanations for the persistence of the apparent unwillingness of British banks to provide long-term loan finance to SMEs. Contrasting experiences will be described in relation to Germany and to the United States.

The contemporary structure of UK banking demonstrates the dominance of the sector by the five major, centralized banks, surrounded by a penumbra of “challenger” banks. It will be argued that even these new challenger banks, whatever their prospectuses may say, have, for a variety of reasons, failed to significantly alter the lack of provision of long-term investment finance to the British SME sector.

The analysis will uncover the historical pattern of apparently risk-averse British banks failing to accept the risks of business lending to SMEs over a 120-year period. One aim will be to attempt to understand how far the attitudes of both the major banks and SMEs, as modern economic conditions emerged in the twentieth century, may have been conditioned by the historical relationships built up during the late-eighteenth and nineteenth centuries. On the other hand, it may also be the case that other more recent factors have compounded these earlier attitudes.

The discussion will proceed chronologically and can be usefully divided into four periods: (1) from the start of the century to the end of the Second World War; (2) the postwar period until 1970; (3) 1970 to the mid-1990s; and (4) the period since 1995.

1900 to 1945

By 1920, a long process of consolidation in the preceding century of small private country banks into larger banks had produced an oligopolistic structure with a handful of dominant banks. Size clearly mattered in terms of the stability of the larger banks and their ability to recruit deposits and to make well-performing loans to individual and to business clients, at least to large companies. In 1920, the government concerned at this concentration, introduced legislation preventing further takeovers without Treasury approval. In the period between 1900 and 1945, five large banks – Lloyds, Barclays, Midland, National Provincial and Westminster – dominated the banking sector