Local authority banks – the door is open!

The hurdles to entering the banking sector used to be high. Considerable cost and time were required to meet opaque regulatory requirements and find the capital required. Those historical obstacles have now been removed as government and regulators determine that the economy needs a diverse financial sector rather than an oligopoly of big banks.

Transforming the broken UK banking system has been the subject of many public and parliamentary enquiries since the crash of 2008. We and many others have shared the experiences and challenges that new banks had to overcome. There is now a consensus and vision of the need for socially useful banking.

That vision is clearly set out and shared in a new film launched this week by our friends at the Finance Innovation Lab. The film Transforming Finance summarises in just over 20 minutes the core systemic issues and the solutions needed to support vibrant local economies.

In the last six months there have been a series of announcements that are game-changers in the environment for new bank entrants. Regulatory and government support for new entrants has itself been transformed to create an environment which welcomes new and sustainable banking models. We have seen a growing number of local authorities and entrepreneurs approach us for help in making their vision of socially useful banking become a reality.

A recent statement from financial secretary to the treasury Sajid Javid confirmed full government support for new regional banks. When we asked if that could include those with local authority support the answer came back: yes!

So what could a local authority bank look like? The short answer is anything it wanted to look like, providing it meets the authorisation requirements for obtaining a new banking license. Normally at this stage the putative banks recoil in horror and run screaming for the door. However, the new reality is that there is nothing to fear. The whole process from inception to implementation can be achieved in nine months with a bit of hard work and focus.

Various flavours of crisis have spurred the interest of local authorities in the possibility of creating their own banks. For example, the Icelandic banking crisis brought the issue right to the forefront of senior local authority officers’ minds. According to a report by the New Local Government Network, over 70% of council leaders are now interested in playing a bigger role in local banking for the benefit of their local communities and residents.

Cambridge and Counties Bank was opened in the summer of 2012 owned jointly by Cambridgeshire local government pension fund and Trinity Hall, a college of the University of Cambridge. They have made a solid start, reporting a profit in just thirteen months of trading, while at the same time enabling its customers to expand their product offerings, increase trade and create jobs in their locality. Hampshire Community Bank has the support of Vince Cable, with an announcement on development funding giving them the chance to galvanise their local authority support.

A number of local authority feasibility studies are being analyzed across the UK with a view to taking next steps. Another early stage discussion is the proposed new Welsh national development bank. A recent report by Prof. Dylan Jones-Evans, commissioned in January 2013 by the Welsh Assembly has clearly identified how this new bank could provide positive support to Wales, in a way that is currently not addressed by the existing players.

While no-one can be certain on what the impact of the Co-operative Bank’s recent troubles will be on local authorities as yet, with a 35% market share of local authority banking contracts we can be certain that it will be significant. The Co-operative Bank has already written to their local authority customers proposing the withdrawal of some services. It is highly likely that a root and branch examination of the issues and opportunities for local authorities in banking has come back on the agenda.

Unlike when the Icelandic crisis hit, there is a now a very clear message that the UK is open for new banks and that local authorities have options they could only dream of in the past! The question now is how many of them are aware of the new opportunities to do much more than just find a safe haven for reserves. Those same reserves could be leveraged to fuel local economies and drive much needed revenue to provision local authority services.

Please contact me if you have any questions.