Prospects for local banking in the UK Duncan O’Leary September 2014

About Demos “Demos is at the heart of public policy debate” - David Cameron “achingly trendy, mind-bogglingly esoteric and ridiculously pretentious” - Financial Times

This project Part of Demos ‘good business’ programme Supported by the Friends Provident Foundation Review international evidence Case study grassroots initiatives Interviews with policymakers Roundtable discussions Publishing late 2014

Political momentum ‘I am committed to turning the idea of regional banks into reality during the next government.’ - Ed Miliband ‘there is an economic opportunity to be seized: not to just reform big banking but to also promote and help create small local community banks, opening up competition and choice, releasing credit and spurring on economic activity’ - Guy Opperman ‘We lack those networks that supply such credit in successful countries, such as the community development finance institutions in the USA and the Sparkassen in Germany’ - Baroness Kramer

The business case ‘Everyone agrees that there is a lending problem for small and medium- sized enterprises (SMEs) in the UK.’ - Andy Haldane, Bank of England SMEs key drivers of economic growth and job creation Access to affordable/’patient’ capital a longstanding problem Large banks not set up to lend to small businesses UK building societies no longer fill that gap Other European countries served by local/regional banks Space in the UK for smaller, localised banks based on ‘relationship banking’ model?

Local initiatives Bank of Salford Hampshire Bank

Lesson from abroad Switzerland: Counter-cyclical lending (Cantonal banks) Germany: profit-making vs. profit maximising (Landesbanken) Mutual support and monitoring (Sparkassen) Spain: Governance and political interference (Cajas) Potential impact on government credit rating (Cajas) USA Partnerships between large banks and local institutions

Tensions in the model Safe + conservative vs. extending credit Best returns for depositors vs. better terms for lenders Social objectives vs. private investment Fair competition vs. govt investment

Policy questions What role for government? Spectrum of options: 1.Removing barriers to entry (e.g. FCA processes, regulatory requirements, access to the payments system) 2.Providing infrastructure (e.g. IT infrastructure, parallels with the National Grid?) 3.Fostering partnership with larger banks (e.g. pressure on banks to release local lending data) 4.Direct Investment (e.g. Local authorities, the Business Bank)

Thank you for listening