The Federation of Small Businesses is urging the government to consider competition in the banking sector in its response to the ICB's final report next week.

The Federation of Small Businesses is urging the government to consider competition in the banking sector in its response to the ICB's final report next week.

The Federation of Small Businesses is urging the government to consider competition in the banking sector in its response to the ICB's final report next week.

The FSB has long said that increasing competition in the small business credit market is paramount for a secure banking industry.

Research by the organisation shows that nine in ten (89 per cent) small companies believe that the banking system needs reform, and 70 per cent say that opening up competition would be key to this.

With five high street banks holding 85 per cent of the small business banking market, competition will drive down the cost of credit for small firms and increase the stability of the sector as a whole, adds the lobbying group.

The FSB adds that UK small business finance market needs additional lenders to inject new energy and product innovation and to provide a buffer if one, or more of the major banks becomes distressed. This is critical since the ongoing crisis in Europe could have major ramifications for the UK's banking industry.

FSB national chairman John Walker says, ‘We hope [the Chancellor] understands that competition and stability are two sides of the same coin. More banks, especially specialist banks, could help to improve relationships with small firms, and boost product innovation. Most importantly, it could reduce the systemic risk of the entire banking industry.

‘We understand that pressures are being placed on the banking industry due to the crisis in the Eurozone, but we also know that small businesses need choice in finance, a working and trusted relationship and innovative financial products to help them grow.’

See also: FSB calls for fair deal for SMEs in 2004