This week, the stranglehold that high street banks have over key bank services – like current accounts, small business lending, and mortgages – came back into view thanks to Ed Miliband’s eye-catching pledge to break up the bigger banks. This would create more competitors, Labour reasons, improving services for consumers.
There is no doubt we need more competition in financial services, but there are other ways to deliver competition – ways that may also be more effective in delivering some of the goals of supporting local businesses, channelling resources back into communities, and helping the indebted, and financially excluded.
One example of this is the Bank of Salford – an initiative developed by the local authority and trade and credit unions to help retain Salford money in Salford. The idea is simple: if the local authority runs its payroll through the bank, and other local businesses also use it for their own deposits, the bank will be able to develop the kind of financial power that will allow it to fulfil a social mission of supporting local people.
Examples of this could include finance for businesses at much better rates than they could get with a bank, or short-term loans to individuals at reasonable interest rates that mean they are not forced to turn to loan sharks for help.
Demos and the Barrow Cadbury Trust ran a series of events at party conference last year that looked at the question of regional banking, and the Bank of Salford offers a valuable case study. Setting up a bank from almost scratch requires significant amounts of money, experience, and involves considerable amounts of red tape. Yet building on existing local infrastructure – credit unions, local authorities – could be an effective means of delivering the kind of local banking that genuinely meets the needs of the local community.
This does not mean, as Sonia Sodha argues in an essay for the Demos Quarterly, creating an entirely new, national regional bank infrastructure from scratch in an effort to imitate a model successfully used in Germany. But what it might require is a proper focus from government on how to give operators like the Bank of Salford access to a common technology platform, and means of financial risk-sharing, to help them be cost-effective.
Political parties love big ideas and it is easy to see why a pledge to break up the banks appeals. But there is a risk that in pursuing this as the means to deliver competition, Labour misses other – potentially far more beneficial – ways to improve our banking system that could not only improve services for retail customers and small businesses, but also help to deliver growth and regenerate local communities.
More work should be concentrated on these areas before we apply the big stick approach.