Advertisement

How to… rebuild the UK’s stakeholder banking sector

Britain led the world in developing mutual financial institutions and public savings banks, but now its local banking sector pales in comparison to that of the US and Germany. Tony Greenham asks what the UK learn from other countries in rebuilding its stakeholder banks?

In September 2011, I invited Niclaus Bergmann to speak at a UK conference on local banking. He is the director of the German Savings Banks Foundation for International Co-operation, and I wanted our delegates to get the chance to hear first-hand about the 430 local banks, known as Sparkassen, that make up the backbone of the German banking system.

He was reluctant at first. With a hint of embarrassment, he modestly explained that his foundation’s mission was to give advice and support to less developed nations who were trying to improve their banking industries, and he didn’t want to suggest that the UK was in this category. I convinced him that when it comes to understanding the value of local banks, we were in the Dark Ages.

His colleague Wolfgang Neumann did come to speak at our conference and when I caught up with him a year after the event he reported that a steady stream of British politicians and officials had been ‘polishing the doorknob’ at Sparkassen headquarters to try to learn more about the German system. So what is all the fuss about?

BRITAIN’S LONELY LACK OF LOCAL BANKS
It is important to realise that the UK banking industry stands out like a sore thumb among our international competitors. We are dominated by a handful of large commercial banks, have almost no local banks and lack the diversity of financial institutions enjoyed by many other countries.

For example, in France co-operative banks have a larger share of the banking market than commercial banks. Germany has a ‘three pillar’ system comprising commercial, co-operative and state-owned savings banks. Public savings banks have a dual financial and social mission. They serve a defined local area and address financial exclusion while operating on a financially sustainable basis. They concentrate on retail banking for SMEs and personal customers, not speculative trading.

In Canada, 45% of the population are members of credit unions and credit union assets amount to 16% of GDP. Credit unions, popular worldwide, offer a restricted range of financial services to members within a community and often focus on the needs of the most financially marginalised.

In the USA over 900 Community Development Finance Institutions (CDFIs) successfully lend tens of billions in the most disadvantaged communities that are overlooked or actively shunned by commercial banks. The UK also has a growing CDFI sector that covers a range of sectors from SMEs to home improvements.

In USA there is even a bank wholly owned by the State of North Dakota. State institutions are required to put their deposits in the bank. It does not have any branches, but provides loan guarantees and lends alongside private sector banks to priority sectors such as SMEs, rural development and infrastructure.

THE IMPORTANCE OF STAKEHOLDER BANKS
We call these other kinds of banks ‘stakeholder banks’ because they serve many stakeholders and not solely the interests of shareholders. Their broader objectives include maximising customer value, ensuring financial inclusion and fostering local economic development. This is reflected in their ownership structures, often by customers or by public institutions, and in their governance, which might include employees, local businesses and elected representatives as well as customers and investors. They are usually small local institutions that collaborate in networks to gain cost efficiencies, offer a greater range of products and achieve great financial stability.

So why is important to have stakeholder banks? Customer-owned banks often focus more on the needs of customers than shareholder banks. They focus more on lending to the real economy, not the financial sector. Local banks can maintain intimate knowledge of local people and the local economy, in contract to commercial banks who, in search of cost savings, have relied more on centralised ‘credit scoring’  and less on local relationship banking.

They punch well above their weight in lending to small businesses and offer longer terms loans. Local banks also play an important role in reducing ‘capital drain’ to urban centres and preventing the widening of regional social and economic inequalities.

Stakeholder banks often provide financial education and try to ensure that everyone has access to finance, including those ignored by shareholder banks because they are not profitable enough. For example, in Canada, 38% of the communities in which credit unions are located have no other financial institution. Co-operatives across Europe provide more extensive branch networks than commercial banks.

HOW TO GROW THE UK’S STAKEHOLDER BANKING SECTOR
The UK does not have these institutions so what can be done to grow them? We see three possibilities which are not mutually exclusive.

First, we can get behind the small but growing community finance sector in the UK. Credit unions have at long last been given powers to lend to businesses but they still remain over-regulated compared with overseas. The CDFI sector in the UK has great potential but needs capital and much greater capacity. Building up shared central systems and financial infrastructure would benefit both and there is a role for regulation to drive investment in these sectors. However, one big step would simply be to publicise them better. Many potential customers who could benefit from these community finance institutions have never head of them. We could all help by spreading the word.

Second, the government must seriously review the option of separating RBS into a network of local retail banks with local governance but shared infrastructure and back-office functions. Most importantly, this public service bank, the BBC of the banking market, should have a mandate to focus on lending to businesses and individuals in each local area and to not engage in risky speculative activities on global financial markets.

Finally, has the time now come for local authorities to act? The Bank of North Dakota was the sole publicly owned state bank for 90 years, but since the crash over one third of US States have commenced legislation to set up their own banks. Can local authorities support local financial institutions or even set up new banks in partnership with others?

If we could achieve any of these changes, perhaps one day Niclaus and Wolfgang might invite me to Germany so they can learn about the renaissance of the British banking industry.

Tony Greenham
Tony Greenham is head of finance and business at the New Economics Foundation

Comments

Subscribe
Notify of
guest
0 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Help us break the news – share your information, opinion or analysis
Back to top