Towards a new kind of banking
There is a political trend emerging, and it has been a long time coming. Ed Miliband is calling tomorrow for a more diverse banking system. We know his office has been considering an American-style Community Reinvestment Act, which forces the big banks to set up infrastructure to lend where they can’t.
Next month, the right-leaning think-tank ResPublica is publishing a report, also calling for CRA-type legislation. Yesterday, we published a report called Rebanking the UK, which began with work with the Lib Dem peer Baroness Kramer (before she became a minister), funded by the Joseph Rowntree Reform Trust.
Rebanking the UK is about the practical way forward for creating a diverse local lending infrastructure, as other countries have, to support small business and social enterprise.
It also concludes, among other measures, that the development of such a critical infrastructure needs to be organised on a more formal basis, as it is in the USA where the CRA requires banks to lend money wherever they are prepared to accept deposits.
There are precedents in the UK for policy instruments that extract money from the banks for broader economic purpose. Project Merlin was not regarded as a success in the UK because it failed to link the amounts the banks were paying to their success or failure in specific areas, and failed to tackle the causes of the lending problem.
Funding for Lending has also been disappointing (siphoned into mortgage lending) because of its failure to see beyond the current dysfunctional infrastructure. What both disappointments have in common is that they are both measures designed to solve the problems that banks could not lend in the necessary sectors, both of which tried to do so through existing banks which clearly lacked the infrastructure they needed to do so successfully. It was hardly surprising the results were disappointing.
But there is a different approach that could be used. In December 2013, the seven largest lenders revealed their lending data down to 9,000 different postcodes. It may be that they can be persuaded, with the prospect of legislation if they don’t, to funnel the money they should have lent to the worst-served areas through a new community and local lending infrastructure, which they fund.
This encourages both sides to maximise the success of the project. Transparency was achieved voluntarily thanks to a similar threat of statutory action, when the banks would have been forced to act. The Re-banking Project would work along similar lines.
This would mean using the new data as a basis for working out how much the banks need to pay each year into a new lending infrastructure fund, administered by the Department for Business, Innovation and Skills. It would replace Project Merlin with something much more effective, paid for by the big banks in line with their ability to re-balance the economy.
The Re-banking Project would launch a more formal partnership between the big banks and the new local banking sector, as well as existing local players like CDFIs, which recognises that the existing banking business model does not allow them to lend effectively to the SME sector, especially in deprived areas. This would allow them to do so, at a small profit, via a new independent infrastructure they have set up. It would also:
- Provide for the banks to fund the new infrastructure, and to provide funds for lending at a reasonable profit via CDFIs, and via the local banking sector before local deposits can be attracted.
- Broker partnerships between big banks and little ones to provide expertise, IT and other systems.
- Put credit disclosure on a statutory footing, covering the community sector too.
- Set up a rating system on the lines of the one used in the USA which would measure bank lending records in more accessible form.
- Support the new lending to micro-enterprises via a community finance facility at the new Business Bank, ring-fenced for community lending, which provides guarantees to make commercial lending possible at lower but still profitable interest rates.
There is also a need to replace Funding for Lending so that the government’s ability to borrow money at lower rates is passed on, not to the big banks – which have not used it as effectively as they could have done – but to the CDFIs, credit unions and local banks to lend on effectively to small businesses.
This is a vital, if not historic, reform for the UK economy, with a real prospect of rebalancing it. It will require the commitment of at least two parties to overcome opposition from the big banks – but I believe this will melt away very quickly. Because it will give the banks, and those working there, a sense of pride and responsibility – and it will allow them to end, once and for all, the question of whether they are lending enough to small business.