From the TUC

In favour of regional banks

14 Mar 2013, by Guest in Economics

This morning Ed Miliband committed Labour to creating a network of regional banks to support lending to SMEs.

Whilst Hopi Sen is no doubt right to note that is one of the least sexy public policy announcements it is possible to imagine, he is also correct to argue that is sensible idea that will help support business growth and investment and help to reduce regional inequalities.

It’s a policy that attracts a fairly wide range of supporters from myself (see this recent Labourlist piece) through to Civitas.  

As I wrote back in January:

Germany’s diverse banking ecology has allowed a more long-term focus by industry, has supported a higher level of investment and, perhaps crucially, has allowed Germany to avoid many of the stark regional inequalities that mark the UK economy…

A diverse banking system with many more players focused on different geographies, different sectors and different types of banking would be more supportive of the real economy, less at risk from the failure of any one institution and would likely be marked by less excessive remuneration.

The Bank of England’s Andy Haldane (the UK’s most interesting thinker on questions of finance) has argued that Britain can learn from regionally constrained lenders:

 For example, take Handelsbanken. How many of you have heard of them? They are not yet a high street name, by comparison with say a Barclays or a Lloyds. But that is changing. They may be the fastest-expanding bank in the UK at the moment. On average, they open a new branch – not a cost centre, a branch – every two weeks.

Their business model is fascinating, Quaker-even, in its orientation. They offer only basic banking services, mortgages and small business loans, to people in a tight, locally-defined catchment area.

All credit decisions are taken locally by people, not centrally by a computer. No bonuses are paid and no-one has a sales-target. When the whole firm out-performs, a contribution is made to a pooled fund which is invested on employees’ behalf. The fruits of success are distributed equally and gratification is deferred.

The announcement hasn’t be met by universal acclaim today. People who I respect such as Dan Davies, Faisal Islam and Aditya Chakrabortty have all expressed some scepticism about the idea on twitter.

I think much of the criticism though misses the point.

One common argument is to point to cajas in Spain or the Landesbanken in Germany and conclude that all attempts at building a regional banking system are bound to fail. This is somewhat unfair given Labour’s proposal’s are specially based on the Sparkassen, which is an altogether different model (see for example the most recent IMF report on the German banking system). This argument is rather like opposing politicians proposing infrastructure spending on the basis of Alaska’s bridge to nowhere. Or saying you should never get on an aeroplane because occasionally planes crash. The lesson of a plane crash is to look at what caused the accident and design planes without those features.

The other main argument is that setting up regional banks seems to be that it will take a long time and not ease the immediate squeeze on SME lending. That is a fair criticism but again, I think, wide of the mark. I don’t see regional banking as way of dealing with the current cyclical problems of bank lending, I see it as a way of dealing with the longer term structural banking problems that have afflicted the UK economy for decades.

This isn’t a quick fix solution and it isn’t a panacea to demand problems. Instead it is a sensible supply side policy that, done well, will support bank lending to SMEs in the various regions of the UK for years to come.

What’s more it makes Labour’s proposals for a British Investment Bank more likely to succeed. As the IPPR noted last year:

However, there are some problems with adopting the KfW model wholesale for the BIB. First, the most important constraint is the difference in institutional banking frameworks of the two countries and the fact that the UK lacks the diverse strata of locally rooted savings banks that are prevalent in Germany, through which the majority of KfW business operates. In the absence of these local intermediaries, the BIB would have to work chiefly through the commercial banks, which do not have a good track record in terms of local market intelligence and catering their products and services for local customers (nor do they have a good record on business finance). A longer-term objective to complement the creation of the BIB would therefore be to encourage greater decentralisation of UK banking and the emergence of UK equivalents of the Sparkassen. Like the Sparkassen, they could potentially be legally mandated to serve businesses in their locale or region only.

This is sensible supply side policy even if it doesn’t set pulses racing. Britain has a large, concentrated banking system that has not proved especially effective at supporting SMEs over the decades. Regional banks plus a KfW style investment bank go someway towards addressing this issue.

5 Responses to In favour of regional banks

  1. Frances Coppola
    Mar 14th 2013, 4:17 pm

    The obvious question, Duncan, is – if regional banks are such a good idea, why isn’t the private sector queueing up to create them? At the risk of sounding like a free-market ideologue, the thoughts of government creating a type of banking that the private sector won’t touch with a barge pole fills me with horror. It seems likely to me that there is a gaping hole in regional banking provision for good reasons. I think it would be worth finding out exactly what those good reasons are before committing public funds to such a scheme.

  2. gastro george
    Mar 14th 2013, 5:01 pm

    “… why isn’t the private sector queueing up to create them?”

    Because while they might be good for customers, they might not be good for (traditional) banks profits?

  3. Frances Coppola
    Mar 14th 2013, 6:57 pm

    gastro george

    Oh, so it’s ok for the public sector to fund loss-making banks, then, is it? Funny, I thought you were opposed to that.

  4. gastro george
    Mar 14th 2013, 10:50 pm

    No, I wasn’t saying that they would be loss-making, just that they might be less profitable than the banks would like. The business might well be profitable but, from the banks perspective, why would you invest in something less profitable than you were doing already? Especially if that business cut into your more-profitable model.

  5. Frances Coppola
    Mar 15th 2013, 10:55 am

    gastro george

    I think the reason why banks have neglected lending in poorer regions is risk, not return. Our banks’ preference is for low-risk lending secured against assets, particularly property. They don’t want to lend unsecured funds to asset-light small and medium size businesses in depressed areas: the risk of default is considerable (can be as high as 50% for startups). And the whole direction of regulation since the financial crisis – notably higher capital ratios calculated on a risk-weighted basis – is to make banks MORE risk averse, not less. The emphasis is on protecting depositors and taxpayers. More risky lending increases the risk to depositors and taxpayers. Bad commercial lending, including lending to SMEs, was implicated in the failure of both HBOS and RBS.

    I suspect a state-created regional bank network would require continual government funding and support to be effective in the more depressed regions. It would effectively be a fiscal transfer from London & SE to other regions. I don’t necessarily think that’s a bad thing, but let’s call it by its name.