Beating the drum for regional banks


Yesterday, Ed Miliband delivered a speech at the British Chambers of Commerce conference and committed Labour to form a new tier of banking in the form of regional banks. Regular readers to this blog will understand the pleasure this has given me as you would have read this and this. So what exactly is he suggesting?

Well, let’s start at the beginning. It is hardly surprising that the topic has gained traction after suffering the financial crash in 2007 – which the economy is still feeling the effects of – and that the rhetoric to ‘rebalance the economy’ and local economic growth comes to the fore. Moreover, in spite of various funding streams and injections of cash by the current Government and the Bank of England to kick-start lending and growth, Ed stated that net lending is down £4.5 billion last quarter and that in the decade leading up to the crash 84% of the money lent by British banks went into property and financial services.

His answer: Sparkassen.

Germany has a three tier financial system comprising of public banks, co-operatives and private banks. In the UK, our financial system is dominated by private banks (who coincidently bought many of our local banks during the 1960’s) but we also have a smattering of co-operatives, credit unions and mutuals. But the real difference is that Germany has another tier of banking in the form of public banks of which there are two forms:

  1. Sparkassen (savings banks): locally owned and run often by cities or a group of cities (not for profit) and concentrates on universal banking (such as loans to individuals and SMEs).
  2. Landesbanken (regional banks): owned, effectively, by the Sparkassen (via the federal system) and can be thought of as the ‘central bank’ for the region’s Sparkassen (by providing liquidity) and also provides wholesale banking (i.e. to large organisations and/or cross region finance).

Public banks have a specific investment remit and, as such, a duty to promote economic growth. Furthermore, they also have a long-term perspective on investment meaning sectors, such as manufacturing, that would need investment and credit over a longer period of time will get the necessary finance – something which private lenders may be more averse to doing for a variety of reasons around imperfect knowledge and investment myopia. Sparkassen not only provide the finance which other private financial institutions would be willing to provide, they also provide extra competition into the market both in service (via knowledge of the local area) and product (competition may drive down costs).

So what does this mean for the UK? Well, Ed recognises that if a new tier of banking is to be created it has to fit within our system – it can’t simply be transplanted from Germany. As a result, Ed wants to create Sparkassen (the thinking is 20 but my suggestion would be fewer – use the old Regional Development Areas) that will lend to SME’s within a defined geographical area and be overseen by the newly created national finance institution, the British Investment Bank.

Many people cite the failings by the Spanish cajas or some regional banks in Germany for being embroiled in the sub-prime crisis but this should not shut down the conversation. Learning the lessons of that bubble should inform today’s regulation. There also those who say that the public sector is unable to ‘pick winners’. This, too, is misguided – investment by any source has the potential to fail. But the current system dictates that when a private bank fails, the public sector pays the bill so why does the thought of the public sector driving some investment strike fear into some hearts?

This may not be the sexiest policy but it is a significant shift in thinking. I welcome the news as long-term credit and investment planning combined with local knowledge has greater opportunity to channel funds into the real economy and less likely to be plagued by large paypackets that decrease money in the real economy. This shift away from short-run profit and towards long-run local economic growth should be the catalyst for rebalancing the economy.

This article was first published on Shifting Grounds


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