Three things missing from Ed Miliband’s speech on banking

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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savings have relied more heavily on centralised ‘credit scoring’ and demanding large amounts of collateral, and have withdrawn from local relationship banking.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.