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Ed Miliband is right, Britain lacks local banks – RBS could fill that void

Why not convert a large, publicly owned bank into a network of local banks like those that operate successfully in Germany? Ed Miliband’s speech to the British Chambers of Commerce marked an important step towards filling a vital gap in our banking system – the place where you live.

The UK banking system, dominated by a handful of national and international banks, is highly unusual internationally. Many of our industrial competitors, including Germany, France, Switzerland, Canada and the US, have a diverse range of successful financial institutions in their economies. Crucially, they all have financial institutions that are wedded to their local area. The Labour leader has now come out in favour of a new UK network of local banks, which would finally give British small businesses and local communities the sort of financial services enjoyed in other countries.

There is plenty of evidence from around the world to suggest that local banks are better at lending to SMEs, improving the stability of the financial system, reducing regional economic inequalities, increasing financial inclusion and providing healthy competition to the giant banking groups.

The UK could clearly benefit from some level of local banking infrastructure, but to grow such a sector organically is, at best, a long-term solution with little chance of capitalising on the current political opportunity for reform.

Enter, then, the Royal Bank of Scotland: a large, publicly owned bank that, for the foreseeable future, will not pay its way by selling it to the private sector. This presents the UK with a genuinely unique opportunity to ask the question: what is the most useful thing you can do with a bank like RBS? With its extensive branch network, a significant share of the retail banking market and large existing customer base, there are numerous possibilities, including converting RBS into a network of local banks, like that seen in Germany.

There are three key elements to success of the 422 German sparkassen, the local authority-owned banks that account for more than a third of the German banking industry and are the primary lenders to SMEs (approximately 75% of German SMEs have a relationship with their local sparkasse).

First, each local bank can only operate within a defined geographical area. This means they are forced to really get to know the local economy and the businesses in it, as they are unable to concentrate on making easier money in wealthier areas of the country.

In addition, local banks generally have a stakeholder governance structure with an executive board made up of banking professionals who have operating responsibility and report to a supervisory board, which is generally composed of a wider group of stakeholders including staff, representatives of local government, customers, trade unions and industry associations. These two factors help ensure that the bank works in the local people’s interest.

Second, the banks aim to maximise value added to the local economy, rather than simply shareholder profits. For the sparkassen, profits are considered a means to financial sustainability rather than an end in itself. As they have an explicit mission to contribute to the success of the local economy, local banks cannot reallocate capital to more profitable but socially useless activities, such as financial speculation or helping global corporations to avoid tax.

Finally, while each individual local bank is autonomous, they collaborate in a network to gain cost efficiencies, serve larger corporate clients and increase financial security. 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.

We mustn’t squander the window of opportunity we have with RBS. So far Vince Cable has shown the greater willingness to think creatively about its future, but fixing the UK’s banking system for the long term is a chance for Miliband to define his leadership and the Labour party.

Tony Greenham is Head of Finance and Business at the new economic foundation, where this blog previously appeared.

Image Credit: 0olong

One Comment

  1. Lyra Katz says:

    Sparkassen are great. As a long standing account holder I’m a big fan. Whether the system would work in the UK however, is a different matter. Such a bank would need local account holders and the German personal financial culture is very much different to that of the UK. Germans are much more debt averse. Far fewer people have credit cards and a most German credit cards in any case have to be cleared on a monthly basis. Debt is seen as something to be avoided (it’s no coincidence that the German word for “debt”, “Schuld”, also means “guilt”, “fault” and “blame”. There are still plenty of businesses in Germany that won’t take card payments (including restaurants – often a shock to tourists). It’s not that easy to get a credit card from a Sparkasse and bank charges are relatively high. They are very risk averse.

    The Sparkasse are mostly in the market for local, small business lending, they know their customers extremely well and that enables them to manage their risk very efficiently. You get a local, personal service. What you don’t get is flexibility and high interest rates for savers. For example, I recently moved. My Sparkasse account is in my former town – if anything happens to my debit card I have to physically go into my old branch (350km away) and request a new one in person. Same if I forget my internet banking password. I need to move my account, but that requires a visit to my old bank…..

    Now, I’m prepared to put up with that because for me the advantages of dealing with a bank who know me personally and who don’t just look at a computer generated credit rating outweighs the inconvenience. The Sparkasse can lend to local businesses because they have the asset base provided by local savers who value the local service over high interest rates. Maybe there’s a market for that in the UK, I don’t know. Any such bank would require strong government support to get off the ground if it’s to compete with the likes of the big High Street banks.

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