Monthly Archives: January 2014

Why middle-sized is beautiful

The news emerged yesterday that the successful publisher Quercus is now up for sale because, according to co-founder Mark Smith, “the publishing industry seems to be polarising around very big and very small companies. It’s difficult for companies of our size.”

The immediate cause of all this is the anti-competitive thumbs up to mega-mergers, like Penguin Random House. And of course to the disappearance of most of the middle-sized bookshops.

I don’t think, when I helped launch the Clone Town Britain campaign ten years ago, that we expected the great clear out of middle-sized retail chains. Nobody really predicted the euthanasia of the clones.

You can see why now. The semi-monopolies like Amazon are riding high. The small, local bookshops have a kind of quirky personality and authenticity of their own – but why go to Waterstone’s?

So much for the middle-sized retailers, and the middle-sized banks were snapped up more than a century ago, in the UK. In fact, the middle sections of the economy are everywhere being hollowed out. The banks don’t like them and they lack the clout of the big or the personality of the small.  It makes the UK economy vulnerable.

I was thinking about this because of a fascinating item on the PM programme on Wednesday (here, 36 mins in), about a conference hosted in Staffordshire by JCB about the German Mittelstand sector – the family-owned middle-sized companies, which underpin the success and stability of the German economy.

Judging by the item on PM, they also underpin the stability of German society. They have few shareholders, since they remain in family hands, but the employ four out of five of all German apprentices.

But the real clincher is that the Mittelstand sector is completely dependent on the German co-operative banking sector. Only 20 per cent of them bank with private banks. The rest rely on co-operative banks or the locally run Sparkassen.

So if you want to see why the German economy is more stable than ours, you need look no further than this. We have no Sparkassen. We have no co-operative banks – in fact, co-operative banks are not legal in the UK (the Co-op Bank was owned by a co-op, but wasn’t a co-op itself).

It is the existence of this banking sector that explains why they have a Mittelstand and we don’t.

How might we develop this crucial sector in the UK, without waiting decades in the usual British way?  Well, we have a plan and you can read it here.

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How to start building a new lending infrastructure

The diversity of the banking system is back on the political agenda.  The government has tended to focus its attentions on the systemic risk to the financial system to banks operating under the safe umbrella of the government guarantee.

Some measures have been taken to increase competition, seven-day account switching, and making it easier to enter the market, but there has been little done to actively increase the diversity of the market, and to make sure the SME market is served as well as it is in other countries.

The closest to a proposed solution at the last general election in 2010 was in the Lib Dem manifesto, which promised to: “Break up the banks and get them lending again to protect real businesses”.  This was translated in the coalition agreement along these lines:

“We want the banking system to serve business, not the other way round.  We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.  We will develop effective proposals to ensure the flow of credit to viable SMEs.”

Our new report Re-banking the UK sets out a way to achieve that – the replanting of a local banking infrastructure in the UK, aware that it is the crucial missing element that rebalances the economies of continental Europe which is currently missing from our own economy. 

It argues that the lending problem is not simply an issue about the information used by existing banks to decide loans, and that there is a more fundamental problem that needs to be addressed – the serious lack of diversity in the UK system compared with its competitors. 

It argues that only a diverse local banking system will be able to provide for the diverse needs of local SMEs, micro-enterprises and social enterprises, and that the shift is required on three levels:

  •  Short-term, by carving a new network of local and regional banks out of the existing RBS network.
  • Medium-term, using the resources of existing banks in partnership with the new local infrastructure, aware that – to lend in this sector – the existing banks need to work hand in hand with a new lending infrastructure that covers those parts of the economy they are no longer set up to reach.
  • Long-term, by encouraging new entrants to the local banking market.

The big banks clearly have a vital role to play in the re-banking of the UK.  But the four biggest are currently receiving subsidies from the taxpayer worth £37.7 billion a year (New Economics Foundation estimate), in the form of the too-big-to-fail guarantee.  They need to rise to the challenge to play a constructive role in return, and this report suggests ways in which they can