ALASTAIR BALFOUR

Whether Burt succeed with their audacious bid to unpick Lloyds TSB's acquisition of HBOS, their intervention should draw fresh attention to a really important issue for the future of the Scottish economy.

That issue is not the future of the whole HBOS operation. To my mind - and those of many within the business community - it is the future of the Bank of Scotland's business banking operation that deserves proper focus in this part of the world.

BOS shares leadership of the overall Scottish business market with Royal Bank of Scotland: each has 37%. Clydesdale comes next, with 18%.

It does not take a top-grade mathematician to work out that Lloyds, Barclays, HSBC, Allied Irish and other players such as Bank of China and National Bank of Pakistan, fight over the remaining 8%.

I understand Lloyds has the largest share of this group with around 4%, mostly at the small and medium-sized end.

Those of us who operate in the young company funding market appreciate that over the last 20 years Bank of Scotland has had a disproportionate influence on the creation and growth of businesses. In its pre-Halifax heyday - the late 80s through to the early 2000s - the bank positioned itself as the first choice for ambitious entrepreneurs.

It built a top-quality team of managers, took a pragmatic view of risk and backed managements that went on to create substantial companies, including those led by entrepreneurial icons like Sir Tom Hunter and Jim McColl.

It went out of its way to provide imaginative funding packages under the Integrated Finance label, meaning it invested in equity as well as debt. It even established a UK first in the form of an emerging business team of highly-experienced, entrepreneurial managers who set out to bank new ventures of high promise.

As a result, BOS had the largest market share in the Scottish growth company market. And during the last recession of 2000-2002, it displayed a nimble creativity in assembling funding packages which protected many companies from collapse. Most of its customers loved the bank; its competitors hated it and warned grimly of problems being stored up for the future.

The huge write-offs reported last week by HBOS probably confirm those warnings.

Sadly, from the market's point of view, all this came to an end with the bank's "Halifaxisation", during which time retail-minded managers whose previous experience was selling mortgages did their best to automate the BOS business banking operation.

In the process, they destroyed the case-by-case assessment by experienced lenders that is such a fundamental part of successful funding of companies. As a result, many of the bank's best managers left, snapped up by competitors for their expertise and client bases. The pioneering emerging business team was summarily disbanded.

Today, by comparison with the pre-Halifax days, the BOS business banking operation is seriously weakened. Its managers clearly have little autonomy to lend and even less money available. Even the best companies with the strongest funding propositions struggle to win backing from the bank. And this is one of the two major players in Scotland.

I'm no economist, but common sense tells you that a strong indigenous business banking market is vital to our regional economy. Right now, it's exceptionally difficult to secure new bank funding in Scotland.

All the banks say "We're open for business" - but in reality they're primarily interested in cherry-picking the best companies that offer the best security and repayment terms, and will pay increasingly onerous arrangement fees.

We estimate that an average company's chances of success in raising debt funding range from 0% to perhaps 50% depending on the bank - and only if they're very well-prepared, professional and persistent.

This is all before any takeover of HBOS. If the Lloyds deal goes ahead, the merged entity will have just over 40% of the Scottish business banking market. Lloyds-HBOS and the Royal Bank will between them have almost 80% of this economically vital market.

Is that really in the long-term interests of Scotland's business economy? Both Lloyds and Royal Bank are excellent business banks with good management teams and a strong track record. They have been long-term supporters of some of our best companies.

But remove the third player, the one that has focused successfully on the growth company market, and choice will be significantly reduced. That's inevitable.

And not just choice, but cash too. Most banking insiders that we talk to predict a significant reduction in the amount of debt that is available overall. That lost funding will not be replaced by equity - the majority of SMEs rely much more on debt than equity to cashflow their businesses.

As ever, the pain will be greatest at the young company end - tomorrow's plcs. And this situation uniquely affects the Scottish economy, because of the strong BOS position in the business market.

What to do? From an entirely Scottish perspective you have to wonder if there's not a different plan required: one in which HBOS is dismembered, with Lloyds taking the personal business, including mortgages, away. That would leave the remaining Bank of Scotland Business Bank, with its commercial and corporate arms, to be reborn, either as an independent operation or as a new arm to another financial institution.

I believe that as this is a Scottish problem, it needs a Scottish solution based on political pragmatism.

The UK Government should insist that the HBOS business bank is hived off from the corporate body and put up for sale to another bank with no significant presence in Scotland - or indeed a credible management team capable of attracting the required backing from public and private sources.

At the same time, the Scottish Government should support Scottish Enterprise with further funding of its largely successful investment arm, together with additional cash to push through its account-managed organisation to more needy businesses committed to growth.

Of course, such a strategy would be complex and difficult to execute. So was putting BOS together with Halifax in the first place, but they managed it (unfortunately). And, of course, the Government would have to reverse its rigid stand on only providing new capital to HBOS if it merges with Lloyds.

However, the fact remains that BOS's business banking operation is still very profitable. It has a large market share, which could be increased in England, as the Clydesdale has done very successfully with its Financial Solutions model. And above all, its support of so many thousand Scottish companies could continue without the compromises that absorption into a larger entity would inevitably bring.

For the Scottish economy, business banking is the most important part of our banks' operations. Personal banking is commoditised, relatively low-margin, increasingly carried out online and adds less value to our GDP than company growth, with its ability to add jobs, capital expenditure and tax payments.

So I regard the future of HBOS as being too important to be left to market forces, albeit forces supported by Government.

Mathewson and Burt may not yet have the right answer to this issue - but they've started a debate which now needs to encompass the funding of Scottish companies. It's that important.