Know any local banks that get the community? Invent them
Nearly 9 million people miss out on the benefits of banking, 1.3 million adults in the UK fall victim to the crippling interest rates of the payday loan shark, 68% of low income households have no savings and small businesses are starved of credit options.
Enter the era of the local bank – funded from local council assets. There are already a few about – including one that's part-owned by a Cambridge college. David Fagleman from ResPublica explores a new approach.
It seems inevitable that after any short period of quiet time, new revelations regarding banker misconduct will hit the news. This time, partly taxpayer-owned Lloyds was accused of unlawful behaviour by the Bank of England and fined £226m for rigging LIBOR and the repo rate.
This recent wave signals that there is much more yet to come. Andrea Leadsom, the new Treasury Minister responsible for the City of London (and who previously worked in banking and finance), admitted early this month that more scandals are likely to emerge. Indeed, at the launch of ResPublica’s latest report, Sir Richard Lambert, Chair of the Banking Standards Review Council, warned that over the coming months a foreign exchange saga will unfold that will show inherent bad behaviour long before the LIBOR scandal had been exposed.
So far, the debate over how to address the problems of our banking sector has focused on prudential and regulatory issues, resulting in a plethora of much needed legislation to create more stable banks. The recent news that the Prudential Regulation Authority will take tough new measures on bankers' bonuses, demonstrates the strides being made to address the culture of personal and short-term personal gain that has been prevalent throughout the industry. However, despite encouraging moves, less attention has been paid to creating a banking sector that truly serves the needs of society.
It goes without saying that a healthy and well functioning market is one that is able to meet the complex needs of its diverse customers. With the needs of consumers varying according to their circumstances, there exists a large disparity in the amount and type of personal, household and business finance demanded by our citizens.
Creating a banking sector that meets such broad demand is essential given the crucial functions they play in our everyday lives. We use financial services from the cradle to the grave: to support a family, start a business, become a homeowner, prepare for retirement and provide that extra bit of credit needed to make the month. Whether we like it or not they are intertwined with our lives, and whether the banks like it or not they have a social purpose to work for the prosperity of customers.
Whether the banks like it or not they have a social purpose to work for the prosperity of customers.
Our banking sector’s failure to meet our needs has had disastrous effects: nearly 9 million people miss out on the benefits of banking (many excluded altogether); payday lending is used by 1.3 million adults (70% of which are on low income); 68% of low income households have no savings and small businesses are starved of credit options.
There are two key distinguishing features of our banking system that have played significant roles in this occurring; the dominance of the industry by national banks and a noticeable lack of locally-based alternatives. Whilst the big five banks hold over 80% of the current account market, our local and regional banks make up just 3% of the banking sector’s assets. This is disturbingly small in comparison to our European and international neighbours, where they hold 67% of the market in Germany, 57% in Japan and 34% in the USA.
We should strive to create such a system here. Local banks and financial institutions hold a wealth of local knowledge which means they are better to understand the idiosyncrasies of their particular area. They will therefore be in a better position to know how best to funnel money to serve the needs of society and by banking locally, residents and business will be supporting their community.
Starting a new network of local banks will take time and investment and there is no better positioned organisation to take up the challenge than local authorities. Sitting on combined pension funds worth a third of one trillion pounds, which if amalgamated into one would be the fifth largest pension fund in the world, local authorities have the capital, might and self-interest to make a network of local banks possible.
We can already see encouraging examples of this taking place. The Eastleigh Borough Council have committed to invest in Hampshire Community Bank and Cambridge and Counties Bank is jointly owned by Cambridgeshire Local Government Pension Fund and Trinity Hall, a College of the University of Cambridge.
What we need now is the up-scaling and expansion of this new tier of local banks. Using local authority assets this could become a reality and we can begin to transform our banking sector to one that truly serves the needs of society.