Transforming finance: a ‘how to’ guide forged in the public interest
Photo credit: John Bradley
May 10, 2013 // By: Tony Greenham
How can we create a more diverse banking industry? This is one of many questions that an alliance of civil society organisations, think-tanks and academics are seeking to answer today at the Transforming Finance conference in the City of London.
You can sometimes see their names carved into the reassuring stone walls of branches up and down the high streets of Britain, but institutions such as the Bank of Liverpool, Leeds Bank, and the Devon and Cornwall Bank have long since been swallowed up into the handful of remote and giant banks that now dominate our domestic banking industry. The disappearance of local and regional banks from the UK economy has been so complete that we now stand in stark contrast to our industrial competitors. With a mere 3% of banking assets in local banks we are a world apart from Germany (67%), the USA (34%) and Japan (57%). Why does this matter?
Research demonstrates that banks focused on retail banking in a specific geographical area perform much better at lending to SMEs – a vital activity in which everyone (apart from our big banks) agrees Britain does badly. Local co-operative banks in Austria, for example, provide 46% of SME loans even though they only account for 36% of the total loan market. In Germany three out of four SMEs have a relationship with their local Savings Bank. Canadian credit unions provide 17% of SME loans despite holding only 5% of total banking assets. Local banks in Switzerland have steadily increased credit to SMEs since the 2008 financial crisis just as large commercial banks severely cut their lending to the sector.
It’s not just SMEs that benefit though. Regional economies are more likely to flourish as local banks help prevent the drain of capital towards the centre. They generally provide better branch coverage, access to banking to the financially marginalised and support for social enterprises too, particularly where they are owned by customers or citizens. They even improve the stability of financial system by adopting more prudent approaches to funding and risk, and produce a more stable flow of profits.
So if they are so great, why did they disappear? In the UK, the search for ever greater cost efficiencies and perpetual profit growth led to banks merging into ever larger companies. Bigger banks were considered to be more financially robust and a safer bet, not least by the Bank of England who tacitly approved of the consolidation of the industry. However, eradicating small banks was not the only path towards cost-efficient and stable banks, and evidence from overseas suggests it was actually a wrong turn.
In many countries, local banks gain cost efficiencies, serve larger corporate clients and increase financial security by collaborating in networks. Crucially, they retain their local identity, management and accountability to their stakeholders. By mutually owning specialist financial companies, pooling liquidity and funding, and providing mutual guarantees to one another, they have learned how to combine the best of local banking with the advantages of size.
The UK banking system is highly unusual in being dominated by a handful of national and international commercial banks. We desperately need diversity; a banking system with more local and regional banks, specialist banks and banks with social and financial goals, such as co-operative and public banks. The question is how do we get it? Creating a level playing field by eradicating the Too-Big-To-Fail subsidy? Supporting the creation of challenger banks? Opening access to the payments systems? Reforming RBS into a network of local banks?
The solutions to this, and many other vital questions about how to transform the financial system being, are being explored today at the Transforming Finance conference at Chartered Accountants Hall in Moorgate.
Although located in the City of London, unlike other conferences that agonise about restoring the public’s shattered faith in our banking system, this is not dictated by the vested interests of the UK’s over-mighty financial services lobbyists.
Co-sponsored by nef, this conference instead brings together leading academics, finance professionals and campaigners to explore how we can make finance work in the long-term interests of people and planet.
How can we create a more diverse banking industry? This is one of the questions on the agenda at today's Transforming Finance conference in London.