Commentary: Banks will need new approach

There is a paradox in the latest figures for receiverships. They have fallen by nearly a third over the year to August even though there is no recovery. Usually, the number of failing companies continues to rise well after the upturn. A small recovery in sales is often not enough to turn a company's finances around, so that the cash drain continues

and the banks ultimately pull the plug. Companies also fail to manage their cash tautly even though they need more working capital in a recovery.

The drop in receiverships therefore requires some explanation. The most convincing hypothesis is that, contrary to conventional wisdom, the banks are being more supportive of their business customers than is usually the case in recessions. This does not mean that they are being charitable, or that they are even bowing to public opinion. Their new patience probably reflects an astute judgement of what they would be able to raise from the security for their loans.

Most lending is secured on property. With commercial and residential property prices dropping, banks may have little option but to bide their time.

If this is correct, there are some interesting consequences. The first is that banks will increasingly find that they have to take equity stakes in companies as a part of any reconstruction, simply because the value of the business lies in its trading rather than its assets.

Banks will also have to revise their lending criteria when the upturn comes. With the property market likely to remain in the doldrums for many years, they will have to make more judgements about businesses and their managers.