The Government can transform British Banking

17^th July 2013

David Fagleman on the state of banking in the UK

This last month has seen a resurgence in activity on banking reform. In the space of a week we were privy to the publication of the Banking Commission’s long awaited report, the Chancellor’s Mansion House speech, and were informed of the departure of both Stephen Hester from RBS and Paul Tucker from the Bank of England. All of which has brought back into the spotlight the discussion on how best to reform Britain’s banking system.

But despite all this activity, it is worrying that we are on the verge of the fifth anniversary of the banking crisis, and the Government still lacks a comprehensive plan of correcting the inherent faults of the financial system. With the future of RBS still uncertain, the Government now has a golden opportunity to break the monopoly of the big banks and help develop a more diverse and localised banking system.

Compared to most of our international competitors, our banking sector lacks diversity and is heavily centralised. Whereas countries such as Germany, Japan and the United States have competitive and diverse banking sectors, with local and regional banks enjoying a healthy market share, the large national banks dominate Britain. Over 70 per cent of the UK current account market belongs to just six banks, around 40 per cent of which is in the hands of RBS and Lloyds TSB. In comparison, in Germany no one bank holds over 27 per cent of the current account market and local and regional banks own 67 per cent of banking assets. In Japan, they hold 57 per cent of assets and in the US, 34 per cent. This is in stark contrast to the mere 3 per cent possessed by our local and regional banks.

As the Banking Commission’s report, ‘Changing Banking for Good’, points out, this situation removed pressure on the banks to improve services and reduce prices. Not being subject to the same pressures to respond to reputational damage as other industries, the banks have been able to sustain poor standards of conduct. Our banking sector is not a healthy market place, and in an unhealthy market it is the consumer that ultimately suffers.

The benefits of introducing greater competition via local and regional banks would be plentiful. With more competition, the demand from small and medium enterprises (SMEs) for loans will start to be met, and using valuable local knowledge, local banks will be able to aid local businesses that can benefit the local area. As it stands in the UK, lending to SMEs has fallen by 25% since 2009 and only 7% of SMEs receiving loans from outside the big banks. In countries with more local baking sectors, the opposite is occurring. In Germany for example, local lending to businesses has increased every year since the recession, and three out of four SMEs have a relationship with their local savings bank. In many other countries, including Switzerland, Canada and Austria, SMEs receive a healthy proportion of their loans from local banks. With an emphasis on local investment, regional banks can help decentralise Britain’s financial sector and providing the investment those regions outside of London are crying out for.

If we introduced regional and local banks following a mutual model of ownership, the role the bank plays in the community could be transformed. Run by for and by their members, mutuals must focus on their member’s needs, and their democratic structure means that if the members are unhappy with how their bank conducts its business, they can change it. A local mutually run bank must therefore be of benefit to the local area and invest locally. Banks should be pillars of the community, improving livelihoods, investing in social projects and aiding local businesses. Mutually ran local banks would be able to achieve this.

What makes it ever more pressing that the Government acts to transform the banking sector is the substantial and growing demand from the public. Last month, at the City and Common Good debate in St. Paul’s Cathedral, Laura Willougby, Chief Executive of the campaign group Move Your Money, announced that according to quarterly marketing figures a staggering 2.4 million customers moved their current accounts from the big banks. With new regulations coming into force this September requiring account switches to be completed in seven working days, this has every potential to turn into a long-term trend. Indeed, a recent survey from YouGov indicates that as many as 14 million people will switch accounts in 2013. The British people are well aware of the failings of our banking system, and with banking scandals becoming a regular feature of national news they are sent a strong message to banks and the Government.

With the future of RBS still undecided, there is a unique opportunity to radically transform Britain’s banking sector into a diverse and competitive market that will benefit the British people. The Banking Commission’s report recognised the benefits of localised banking and called on the Government to consider alternative strategies for the future of RBS. With the public taking matters into their own hands, the Government needs to respond and ask if they really want to change banking for good. If they do, then they need to use this opportunity wisely; it most likely will never come around again.