Wednesday, 26 March 2014

The problem with the banks is often the politicians

Over the past six months, and thanks to Baroness Kramer, the Joseph Rowntree Reform Trust, and some others, I’ve immersed myself in the issue of local banks.

I’ve always been interested in why, almost uniquely, the UK has such an over-centralised banking system.

The answer is largely Barclays, because they led the extraordinary process of consolidation between 1870 and 1920. Only in 1919 did the government step in and say the last big five banks standing must stay.

We still have a Big Five, and they have 85 per cent of the current account market, but they are a different Big Five to the one that Montagu Norman kept in place in the 1920s and 30s.

But then, Norman’s therapist – the great Carl Jung – said later that he was insane. We shall never know...

The real question is whether this over-concentration serves the UK economy or not, and here there is a new factor.

The politicians and banks have been squabbling since 2008 about whether or not there are enough opportunities to lend to small business.

Recent figures confirm there has actually been a change. The total stock of money lent to SMEs – over 99 per cent of the businesses in the economy – is still falling.

In every other nation in Europe, small business lending has returned to pre-2008 levels. Here the rate of the reduction has slowed down, but it is still going down.

This isn’t the fault of the banks. It is a logical response to the new Basel regulations and to global competition.

The real change is required, not from the banks, but from the politicians. They need to stop beating up the big banks but to accept that small business lending is difficult yet critical to the economy. It must be done by someone.

That is the first shift that is required, and nothing else will happen until it does.  It is too convenient for politicians to keep the banks to blame, without actually realising the basic problem.

The second is this. The big bankers get very considerable privileges for their role in the economy, personally and professionally. If their banks are no longer able to lend in that market, then they must create an infrastructure that can.

Why has small business lending recovered in other European countries? Because they have a local banking infrastructure, and an infrastructure that takes deposits rather than just lending other people’s money.

It isn’t just going to appear magically, via the hidden hand. Of the 30 new banks now awaiting approval from the regulator, only one plans to provide current accounts.

There is no way we can rebalance the economy without these in the UK. That is the big shift that is required – but the politicians have to move first.

Subscribe to this blog on email; send me a message with the word blog subscribe to When you want to stop, you can email me the word unsubscribe.


Iain King said...

Do we need banks? They take a huge margin. Can't we just support SMEs though effective peer-to-peer lending, which cuts out the middle men and their rather fat financial margin?

David Boyle said...

Peer to peer lending is going to be very important, but there are three reasons people need banks as well - first, P2P doesn't solve the problem of the information about local risk you need before lending to SMEs. Second, only local banks can reconnect local deposits with local enterprise. Third, local business needs bank branches to deposit cash.