Banks need to be broken up and refocused on communities

Lord Mandelson said, last November, ‘It’s completely unacceptable to the Government and to business in this country for banks indefinitely to stop functioning as banks.’

In doing so he revealed the government’s confusion: they’ve recognised banks are failing us but not why. Until they acknowledge that banks have become unfit for the purpose of supporting local economies – the motors of recovery from recession – they’ll be throwing good money after bad through their increasingly desperate bail outs. Quantitative easing is just the latest brilliant wheeze for banks to take our money cheaply and then lend it back to us far more expensively.

Our banks have become far removed from their roots as lenders and investors in communities and businesses, as we reveal in our new report, I.O.U.K: banking failure and how to build a fit financial sector. Decades of banking sector consolidation have been encouraged by lax regulation. There are now fewer bank branches than post offices in this country – and the number is set to drop still further. Meanwhile, Community Development Finance Institutions (CDFIs) have been starved of support while attempting to address this failure directly.

Now the Government has scrapped the scheme it previously used to support lending to small businesses in favour of a £1 billion Enterprise Finance Guarantee – geared towards helping big banks lend to larger companies.

Banks need to be broken up and re-focused on supporting small businesses and local communities. The EFG should be reformed to make it more useful to those sectors. And we need a Community Reinvestment Act and grant scheme to bring the community finance sector to maturity.

Two case studies in the report reveal how CDFIs are supporting viable small companies rooted in their communities, in ways the big banks just aren’t fit to do.

Attempting to return to business as usual is pointless, that is what got us here in the first place. Yet Government continues to shower these failing institutions with public money. It needs to think about what that money is for: saving banks or saving the economy?

IOUK can be downloaded from www.neweconomics.org