With full disclosure banking could be a race to the top

Reforms to make banking competition work for consumers have reached an impasse. Do nothing and we can expect nothing to result, but even with Project Merlin – which was established by the four major UK banks (HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking Group) and hopes to improve stability and competition between banks – lending fell for Britain’s top banks in every quarter a year after its implementation.

So does that mean we are all out of ideas to make banking competition work? Absolutely not. But how do we make banking competition attractive for both consumers and banks themselves?

In a recent briefing paper for the Centre on Household Assets and Savings Management, I discussed the development of a Responsible Banking Ordinance (RBO) in the US and raised the prospect of introducing RBOs in the UK.

An RBO is a specific evaluation guideline which banks must complete in order to make their investment in a local community more transparent. In the US they have been introduced in many cities already including Boston, San Diego, Los Angeles, Dayton, New York, Philadelphia, Pittsburgh and – the earliest adopter from 1991 – Cleveland.

All banking firms operating in a given city are required to disclose, in full, the following:

• Residential lending information
• Small business lending information
• Community development loans and investments
• Branches and deposits information
• Consumer loan data
• An affidavit by an authorised officer
• A CRA evaluation
• Copy of branch closing policy
• The number of minorities, females and city residents employed by the depository as loan officers/senior staff etc
• Any additional information requested at a local level

The RBO follows on as a city-level addition to the Community Reinvestment Act (CRA) in the US. Introduced in 1977, the CRA was originally established after the realisation that many banks had been indirectly discriminatory towards certain communities populated with low-income and/or large numbers of ethnic minorities by underserving them – a practice known as redlining.

By 1989, Congress had moved to amend the act requiring regulators to make their CRA evaluations more transparent. This had very positive results. From 1990-1992, only 939 banks (9.8% were deemed in need of improvement and 87 (0.9%) substantially non-compliant out of 9,520 banks covered by the CRA.

Advocates of a UK-specific CRA made a partial breakthrough in 2014 when the Treasury announced plans to publish local lending data of a number of participating banks in 10,000 postal codes, in order to make financial investment in the area more transparent and subsequently make it easier for smaller financial firms to identify unmet need and develop suitable financial products.

One small problem is that participating banks opening access to their data make up only 60% of unsecured loans. When the transparent data is this partial, its usefulness becomes limited.

An RBO disclosure would be a corrective to this, obliging all financial services firms to submit applicable information.

Back to the question of competition, with an RBO I believe our banking system would move closer to one that differentiates firms on how accomplished they are and how able they are to invest and meet the needs of the local community. Banking as a ‘race to the top’.