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

 

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