Local economies need local banks

19 Apr 17

Regional banking could combat inequalities between areas, boost businesses, undermine the big banks’ cartel – and provide a personal touch

Branches of Yorkshire Bank, the Co-operative NatWest, Barclays and HSBC have all recently closed in Royton and Chadderton in my constituency, almost completing the withdrawal of Oldham’s community banking facilities. A drop in footfall and financial exclusion will follow.

Banks are a vital part of the British high street. Communities need strong services, and access to banks is critical. Much banking is done online but, in my borough, 17.4% of people have never been online and 27% do not have basic digital skills. For those who prefer or need face-to-face interaction, counter services are critical.

Perhaps a better future than one of continued reliance on the cartel of high-street banks is possible. We have let them privatise profit and nationalise risk, even after they crashed the economy in 2008, and we bailed them out with a vast public-to-private payout. If we want to rebalance our economy, geographically and by sector, we need it to go beyond unproductive finance and property. Left to the same old bankers in London, personal debt will balloon again while the next housing bubble inflates.

We need investment in the real economy in every region. This means making capital available to small and medium-sized enterprises to catalyse grassroots business renewal. Some SMEs struggle to fund growth or create product lines. Others may need support to stay steady when cashflow is a problem. People will want to launch microbusinesses.

Credit unions are geared more towards people than businesses and lack reach. What inclusive growth needs is a network of regional banks.

Regional banks could help make financial devolution a reality. They would lend only in their region – an important constraint to counter the capital’s tractor-beam effect when it comes to investment. Without getting all misty eyed and invoking Frank Capra’s It’s A Wonderful Life, regional banks could herald a return to a more relational form of banking, as opposed to the impersonal, reductive attitude of the big banks today. At a new bank, run for the public good, customers would be more than just numbers.

In Germany, the Sparkassen network of local banks has a 40% share of the market in business loans, is established in municipal law and has an integrated back office and national risk pooling. It was largely unaffected by the financial crisis. In Australia, regional banks’ relational approach is more popular with SMEs than the big banks’ more transactional model. If Germans and Australians can invest in the real economy throughout their countries, why should the UK be doomed to endless speculation in Canary Wharf?

Regional business banking could be more nimble and less monolithic than the status quo. Combine this agility with local market intelligence and regional banks start to look more attractive from an SME perspective. If we do not want to rely so heavily on the volatile City to power our economy, we need more diverse banking. If we want to reduce regional inequalities, then properly endowed regional banks can be part of the solution.

A strong mix of SME lending supporting a network of local credit unions would genuinely make a difference to communities and the ability of small businesses to thrive and grow.

Such approaches haven’t always worked. Spain’s cajas savings banks, for instance, did collapse. But we can learn from their mistakes. Even the risk-averse Bank of England has praised the principle of lending within regional constraints.

So bring on regional banks, embedded in communities, supporting local businesses and treating each and every customer like a human being.

  • Jim McMahon
    Jim McMahon

    Labour’s shadow minister for local government and devolution. He tweets @JimfromOldham

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