A big idea for British banking
The 2007 world banking crisis affected most developed economies but some more than others.
Germany’s regional banks, the Sparkassen, show why Germany suffered less than most and what , belatedly, we need to do to make our banking system better for business, consumers and society as a whole.
British banking is uncompetitive, centralised and unresponsive to the needs of our real economy.
It is uncompetitive because there are a tiny number of banks offering similar services. It is centralised because it is remote and divorced from direct connection with local economies. It is unresponsive as I still receive the same complaints from my constituents about banks not listening and operating by diktat from a distance.
In 2012, five years after the disaster that was 2007, our banking system is, in substance the same one that caused the worst crisis since 1929. That system was created in the 1980s when demutualisation of British building societies, coupled with increased mergers and acquisitions, led to the divorce of British banks from their communities.
Great regional institutions such as the Halifax Building Society and the Leeds Permanent Building Society were casually cast aside in a headlong, subsidised rush to conversion to PLCs. At the same time, the banks became increasingly centralised so that it became increasingly difficult for local businesses to maintain mature relations with banks. Credit was doled out by numbers, based not on assessment of risk by individuals with long term relationships with customers but on the basis of formulae designed at a distance, remote from the local economy.
In contrast, Germany retained its strong regional banks, the Sparkassen, rooted in their local communities. These private banks are run by management boards comprising of bank employees and local government representatives. They are limited to providing finance within strict geographical areas and are supported financially by local people who pay their wages into the Sparkassen and approach them when they need finance.
The Sparkassen compete with other banks but hold over 25% of their local market. They must be responsive to the needs of their local economy because they cannot operate anywhere else. Their boards exercise financial discipline on their employees so that the obscene bonuses that we do not seem able to stop in Britain are not contemplated, let alone paid.
In Britain, our banks are massive, remote institutions, often owned by multinational corporations: HSBC, which took over the Midland Bank; Santander, which now runs what once was one of the UK’s most successful Building Societies, the Abbey National. HSBC’s marketing strap line is that it is “the world’s local bank.”
Why not have our own local banks?
One of Labour’s most successful innovations in 1997 was devolution. One of its biggest mistakes was not to reverse the centralisation in finance which was established in the 1980s. This centralisation is one of the major causes of the unresponsiveness of finance to the needs of British business and our addiction to placing short term return ahead of long term investment.
We need devolution in finance.
Let’s learn from Germany and return to what worked in Britain before subsidised greed pushed us towards demutualisation and privatisation. There is a tradition in the British model with local building societies and, further back, local banks. Let us reinstate that model, invest in those institutions ourselves and build a finance system for the future.