The following blog was posted by the New Economics Foundation on its website today in response to Ed Miliband's speech on banking. I thought it worth sharing, and do so, with permission:
It's encouraging to hear Ed Miliband today pushing for further banking reform, such as market share caps to reduce concentration in the banking sector. However, while Miliband's speech is to be welcomed, his vision falls short in three regards.
1. What benefit will there be to creating new banks if they behave the same as the old ones?
I question whether market share caps prompting a branch sell off is the right mechanism to achieve a more competitive retail banking market. A couple new challengers that behave the same as our existing banks will not change much for bank consumers or businesses. The point is not to have more banks competing on the same business model of short term speculative profits, but to have competition across different business models with diversity of form and function.
2. We need to talk about ownership
Discussing scale and ownership structures might sound dull, but they have a large impact on the behaviour within organisations. For example, local banks, which are restricted in their geographical reach, and are owned and/or controlled by their local economy and the stakeholders in it, maintain intimate knowledge of local people and the local economy.
Evidence suggests that they are better than giant banks at seeking and assimilating the ‘soft' information needed to holistically assess the prospects of small firms. In contrast, megabanks in search of cost savings have relied more heavily on centralised ‘credit scoring' and demanding large amounts of collateral, and have withdrawn from local relationship banking.
3. He forgot the L word
The UK is unique among most other major economies because of its lack of local banks — the institutions that are the powerhouses of small business lending in many other countries. For example, 75% of German SMEs bank with Sparkassen, the German local public banks. Large banks also appear to lend proportionally less to SMEs than smaller banks. For example, in 2010 local cooperative banks had a significantly larger shareof SME loans than their overall market share in Austria (46 per cent of SME loans, compared with 33 per cent of all loans), Germany (28 per cent vs. 17 per cent) and the Netherlands (43 per cent versus 29 per cent).
Large banks simply aren't well placed to do this sort of lending. We are not arguing that local banks are always preferable to large ones, but rather that different types of banks are good at different things. This is why a healthy economy needs a diverse banking system.
A good start would be to consider all options for RBS, including breaking it up into a network of small, regional banks. Given its extensive branch network and large market share, the public's 82% stake represents a unique opportunity to set the UK's banking sector on a better path.
In short, we need to be much more ambitious. It is not just about increasing the number of banks, but increasing the different kinds of banks.
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Regional/local, much of a muchness I’d say. I’ve heard regional used in connection with Miliband’s proposals so I assumed he’s on the right track so long as these banks aren’t owned by the same folk who run the big banks and run them the same way. We all need local versions of the bank of North Dakota but I’m not yet convinced we’re going to be getting that or even if Miliband appreciates why they’re needed. Douglas Carswell’s just released his own plans for banking reform, more here and at least he’s prepared to go on Sky News, this from deep within the enemy camp, and say outright that banks shouldn’t be allowed to create credit from nothing, a crucial element of bank reform we’ve yet to see recognised by Miliband.
Indded -carswell is on the right track, why he is a Tory M.P I don’t know. As you say we need to stop the ‘candy-floss’ money (as carswell calls it), we also need to stop forms of speculation and financial instruments that syphon off wealth rather than contribute to its diffusion. In other words, there needs be a clear definition of wealth creation that is socially useful. If the Sherman Anti-Trust laws in late 19th century America could break up the ‘robber barons’ surely we can do it now!
We had local banks, they were brought up by Santander.
From the other side of the “Pond”
http://www.truthdig.com/report/item/overthrow_the_speculators_20131229
A Peoples Mutual Trust Bank run through post offices?
And if not possible in the medium term why not consider organizing a popular mutual which might be possible by buying up the 27% of the Unity Trust Bank that the Cooperative Group have put up for sale? This would need a benign accord with the trade Unions and a critical mass of support.
Great idea as long as they have the power to lend like the commercial banks and not be some form of credit union.
They should be state run too – like I keep saying, like the model of the Bank of North Dakota! Use local revenues as a deposit base for low interest loans.
This bank has to be prevented from indulging in speculative practices too. The suggestion to run the bank through the Post Office is common sense too as the infrastructure is already there to run local banks!
Remind me how the ‘local’ banks in Spain turned out…
As I have already noted, if a failure indicates we must never try anything again that’s the end of humanity as we know it
Remind me again how our large “high street” banks performed…….
“Remind me how the ‘local’ banks in Spain turned out…”
Surely you should be pleased that they were behaving much like their counterparts the commercial banks?
Whatever the faults of certain regional banks, at least they didn’t nearly take down the world economy!
As a matter of fact, isn’t there some excellent Spanish regional banks? As there is in Germany?
Vince Cable, who is not always the best communicator, although I think very very smart, re-iterated on NewsNight THAT THERE ARE OTHER MODELS OUT THERE and that the present government has actually done some good stuff, irrespective of all we read on some blogs!
Why always trying to tinker with the banking model, for which there is no proof at all that mutual or coop banks (tks Rev. Flowers) are so much better than the others. Yes, improve regulation and I think the new powers of the BoE, are a substantial improvement.
Vince Cable was referring to the alternative financing models for both consumers and SMEs. I do not want to advertise them, but ZOPA on the retail and more importantly Fundingcircle on the SME are great examples. I have personally several 1000s of my savings with Fundingcircle earning me much more than I would with the banks and SMEs can pitch their story and raise 2 to 5 year money faster and cheaper than they would from banks. The government has actually allocated large sums to the platforms and is earning commercial rates along the other savers on loans to SMEs.
What does that mean:
1) taxpayer earning good returns
2) savers have alternatives to banks for 3-5 year deposits
3) SME have alternatives
Focusing on banks is not the only solution.
These platforms are still small, but they operate very well and do deliver in full transparency.
The only downside is that these new platforms are no big employers. The main reason it is difficult to clean up the banking sector in many countries is that they are HUGE employers and add very little value. Certainly not to me.
I think this is the future of funding
Thank you for agreeing with me. Must be the first time… 🙂
This is a very much free market type of approach. Let the market price the loans!
It has unfortunately the disadvantage that it requires a certain degree of financial education to even approach. I am going through every little loan that I am making 50 to 100 quid at a time, selecting sectors I like in terms of risk, going through the numbers, however limited they are etc…
For once, no government intervention other than investing along the government in small businesses.
Lucas
Zopa don’t operate exclusively on the retail side, quite the reverse. Much (most) of the loans are to businesses although I’d say more micro than SME in scale.
If there was the opportunity then I’m sure people like Zopa & Fundingcircle could expand exponentially & would take on a lot of new staff.
Regional banks are the way to go?………….Really?
Are we to forget the total disaster of the regional banks in Spain and Germany?…..The corruption, political manipulation and resulting huge losses in dodge property loans (Spain) and US derivatives (Germany).
Let me guess, just like the last idea for Cooperatives all past evidence must be ignored because ideologically you like the idea. You get more and more like the Coalition every day!
So a mistake guarantees replication, does it?
In that case, let’s abandon banking now
I mentioned North Dakota for a reason.
Richard
OK, well we definitely won’t want to continue with the big national banks because (post 2008) it is abundantly clear that they’re a disaster.
As you say, there is evidence that regional banks can be almost equally flawed.
So why don’t we all withdraw our deposits as gold doubloons & hold them under our mattresses. That’ll work, won’t it ?
While we’re all running down local banks, shouldn’t we remember Worgl which worked so well the banks got it shut down? So that’s Worgl and North Dakota we have as examples of local banking which have worked well for the broader community. There ARE alternatives.
“As you say, there is evidence that regional banks can be almost equally flawed.”
And there;s more abundant evidence that many regional banks work very well too! Many of the commercial banks were corrupt as sin, but I don’t see any rush to fully nationalise them, so you?
In fact, is is very much business as usual with the government’s blessing!
I think this makes a lot of sense – I think we need a mix of public and mutual ownership at several different scales from local to national. I think PLC shareholder-owned banks are too dangerous to be allowed to continue in their current form – they almost brought down the entire global economy and they’ll do it again given half a chance.
I despair of Labour economic policy at the moment. Sometimes they are aiming at the right target but their proposed solutions are still far too close to New Labour neoliberalism to be any good at all. Anyone who really thinks that breaking up a couple of the biggest banks into smaller banks while leaving the ownership structure unchanged will do any good at all needs their head examined. We can see the policy is a failure already. For example, Lloyds Group has demerged Lloyds and TSB. Spot any real change on the high street? I didn’t think so. There was plenty of competition between PLC banks in the run up to 2008, too much competition in fact – it was the urge to compete (combined with slack regulation) that built the subprime and CDO bubble. In many cases in economics more competition makes things worse, not better.
Very interesting point about competition Howard.
It is very true that there was too much competition on some products pre-2008. I for one, got a mortgage from a Halifax affiliate at BoE + 0.39% with offset facility. FYI, I was unemployed at the time!!!! I am paying on whatever amount I want less than LIBOR!!!!! So yes, that was stupid competition.
The real problem, and as much with retail banking as with the so much hated investment banks, is the implicit and explicit state guarantee.
Deposit insurance up to 85k is a corrupt concept. Especially, that a a same individual can be protected several times with different banks! Unfortunately, I can’t see any government, left or right, trade union or whatever daring to say that they withdraw this deposit insurance!!!
I fully understand that withdrawing this would have the whole system collapse. It nevertheless probably is the most perverse subsidy to the financial industry, all of that in the hope that these deposits will result in appropriate loans.
I just do not know how to resolve this and let the markets penalise the banks in a normal way for failing.
Maybe that in a perfect world, all banks would be free to trade, but with no deposit insurance other than what they provide through the free market and next to that a “state banks” which offers no return to depositors, but a full and explicit state guarantee on all deposits. I know this won’t happen, but it is a good idea!
Let banks then compete with Zopa and Fundingcircle!
The best way to get banks to perform their necessary function is to remove the lure of rent. And that can only be achieved by a full land value tax.
Without their ‘free lunch’ money the banks (hedge funds) would fold….bring it on!
A read of PILLAGING (David Craig) will quickly lead to pessimism..
The banks are a large part of the problem, but the rest of the financial institutions, even single-person financial business, are rotten to the core. The problem is a lack of morality and responsibility. The responsibility to the customer. Money wins.
Political parties are run by millionaires, nothing is going to change that too much.
The banks, as has been revealed too frequently, are run by crooks. Furthermore, they have a ¨no chance of prosecution¨ protection from the system, which includes politicians.
Even if/when they get to court, the penalties are derisory.
Early colonial America ran on largely debt free “greenbacks”. Australia’s state bank ran very well in the early 20th century, as did Canada’s. The state bank of North Dakota proves banks van be tun for the common good. China’s bank is still state run.
There is a place for well run, efficient state banks working for the common good. Australia and Canada were conned out of their state run banks by neoliberal economists who claimed to know best but really didn’t want the competition from these banks, so they used deceit to kill them off!
Money only wins if we allow it to!
Bloody typos! 🙁
Embrace them
I do
Or I’d go quietly mad
It’s worth noting that in China’s command economy money is created from thin air which they come here and buy property and gold with…
How will he cope with this:
http://www.unitetheunion.org/how-we-help/list-of-sectors/healthsector/healthsectorcampaigns/unite4ournhs/the-care-bill–clause-118/
Could you be a bit less outspoken Rowan:
¨But why should it? Why should the action of a bunch of flaky gamblers hold the interests of millions of ordinary British people to ransom. There is nothing intrinsically wrong with requiring more banking competition on the High Street, although the real problem is that most banks couldn’t care less about retail banking operations any more. In fact for the big players, retail bank accounts are not a means of making money, which is why they are so happy to get customers into debt, or screw them with dodgy products, cheat them with fraudulently offered insurance products, gouge them with interest rate swaps or any of the other many forms of downright criminality that they have committed in recent years¨
http://rowans-blog.blogspot.co.uk/2014/01/ed-milliband-is-right-there-must-be.html
“It’s worth noting that in China’s command economy money is created from thin air which they come here and buy property and gold with…”
Great point about China’s debt-free money creation. However, China isn’t strictly a command economy in the communist sense any more. It doesn’t really control all the means of production the same way it used to.
If by “the means of production” is meant labour, land and capital, China has certainly lost control of land – there is huge land price inflation which they have no idea how to control. (The answer is, of course, to collect all land rent for public revenue.)
Although they, very wisely, still have tight hold of finance, the Chinese government doesn’t really have totl control of the mens of production anymore as they have allowed foreign firms to set up shop!