There could be a case for more localised capital markets

14 Jun 19

Decentralising the financial system could rebalance growth across the country - and help local authorities as they become increasingly reliant on business rates, suggest Ben Gardiner and Ron Martin, authors of a recent Core Cities report. 


The UK’s financial system has long been overwhelmingly concentrated in, and controlled from, London.

Some are concerned that this spatially-biased structure has resulted in recurrent funding and financing gaps for small and medium sized enterprises (SMEs) in the major cities and regions outside London and the South East.  

This is one of the findings of recent studies by Cambridge Econometrics and the University of Cambridge for Core Cities UK.

The report find that plans to curtail central government grants to local authorities could well work against the less prosperous cities and benefit London most.

Despite government rhetoric the era of austerity is almost certainly not over and cities looking to provide the right conditions for growth and higher-value jobs would do well to look for alternative (non-public sources) of finance to facilitate their goals.

Evidence from abroad

The situation in Germany suggests that a more decentralised financial system is associated with more evenness in the allocation of funding to firms.

The German banking system has a significant regional dimension, with venture capital markets in a number of major cities.

This contrasts sharply with the picture in the UK, where venture capital is firmly centralised.  London and the South East accounts for 75% of venture capital firms and 60% of venture capital investment.

There would appear to be a strong argument, therefore, for a more decentralised financial system in the UK (there were, after all, 20 local stock exchanges in the country’s major cities in the 19th century), with the formation of local capital markets in the ten Core Cities outside of London and the South East. This could do much to boost new and small firms.

A report on rebalancing the UK economy, produced for the Regional Studies Association in 2015, made similar suggestions.  

Advantages of localised finance

There are a number of potential advantages that local regional capital markets based in the Core Cities could confer:

  1. The presence of a local critical mass of financial institutions and agents enables SMEs and local investors to exploit the advantages of close spatial proximity;
  2. The existence of such local capital markets may help to keep capital within the regions, as local investors direct their funds into local businesses – and local economic development – rather than investing on the central market in London;
  3. Local markets could also fulfil an information and networking function between local SMEs and the central market in London; raising local SMEs’ awareness of financing options and collecting information on local businesses for use by national players and investors.

In short, a decentralised structure based across the Core Cites could help to reduce information asymmetries and thereby increase the flow of funds from the London centre to the regions.

Recent attempts have met with mixed success…

This is not to say that establishing local capital markets is easy.  InvestBx, the Birmingham-based share trading platform set up by the former West Midlands Regional Development Agency in 2007, failed in 2017.  

In contrast, the Cambridge Counties Bank, a joint venture between Cambridge City Council Pension Fund and Trinity Hall College, Cambridge, established in 2012, has grown rapidly, with a deposit balance of £900m and a lending balance of £770m in 2018.

It lends asset finance to businesses and (re)development finance to property schemes and purchases.

Another possible way forward is to further regionalise the efforts of the British Business Bank (BBB), a state-owned economic development bank focussed on SME finance.

Already three regional investment funds (covering the Northern Powerhouse, the Midlands Engine, and Cornwall and Isles of Scilly) have been announced, and more are expected to follow as the BBB is due to take over the current role of the European Investment Bank when, and if, the UK ultimately leaves the EU.

Our view would be that such efforts should not wait for Brexit to happen but should be accelerated and based around the Core Cities to help speed up the much-needed process of spatial rebalancing in the UK.

  • Ben Gardiner
    Ben Gardiner and Ron Martin

    Ben Gardiner [pictured] is director at consultancy Cambridge Econometrics and Ron Martin is professor of economic geography at Cambridge University

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