WHY THIS IS A CREATIVE MOMENT IN UK BANKING

It was an unusual alliance led by Lib Dem members of the House of Lords that made this possible. 

During the debates around the Financial Services Bill last year, they inserted a clause which would force the banks to reveal the geographical lending data – where their loans and mortgages were being made.

Eventually, the banks agreed to reveal this information down to 9,000 different postcode levels.  On Tuesday, the figures will be available.

The revelations look set to be embarrassing for the banks, but don’t let’s go over the top on this.  Nothing that is revealed will come as a surprise for those of us who have been following the issue of dysfunctional local banking – and it is to their credit that they are being transparent.

The issue is what we should do about it.  Because if the existing infrastructure is not able to lend to small business – and that seems to be the message – then we need an infrastructure that can.

It seems clear the direction of travel, now or later.  The big banks will pay for that new infrastructure, and will shape it, based on the money they are not able to lend to productive business locally.

The Americans have used geographical lending data since 1977, in their Community Reinvestment Act, to determine how much the big banks must pay to build a local lending infrastructure – of community banks and community development finance institutions (CDFIs) – to lend where they find it difficult.

This will replace the succession of measures we have had in the UK – Project Merlin, Funding for Lending – which have not persuaded the banks to lend more in the critical SME sector.

It is already clear that the banks will struggle against this.  Their fightback is already clear: they will say that Community Reinvestment Act (CRA) lending caused the sub-prime meltdown in the USA.

They must know this isn’t true.  The Federal Reserve investigated it and found that, actually, CRA-backed loans were half as likely to default than those loans made by institutions which had opted out of the CRA.

In fact, CRA lending was an insulation against financial meltdown.  And if you don’t believe me, read the findings:

E. Laderman and C. Reid C, 2008 ‘Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown’ Working Paper 2008-05, Federal Reserve Bank of San Francisco

So why are the banks peddling this nonsense, when they know it isn’t true – and when they operate inside the CRA framework themselves in their US subsidiaries?  Who knows.

But let me make this prediction.  Within three years, the UK banks will be happily operating a related system, financing a new local lending infrastructure – which can genuinely rebuild local economies.

And they will do so willingly and with conviction and pride, because it allows them to end the argument once and for all about whether they lend enough to SMEs.

It is also the most important policy move that we can make to re-balance the economy.  And it all kicks off on Tuesday – as long as people are forewarned against the disinformation about the CRA in the USA.

It didn’t cause the sub-prime crisis.  Quite the reverse.  Don’t let them get away with quite such a blatant reversal of the truth.

 

 

 

 

CAN WE LEARN FROM VERMONT AND NORTH DAKOTA?

David Boyle writes:

There are rumours of a political squall the capital city of Vermont, about the promotion by public employees of the idea of a ‘public bank’.  A big enough squall to ruffle feathers a little over here.

 

The mayor of Montpelier, John Hollar, has told off one of his employees, Montpelier’s city planner Gwen Hallsmith, for her very public advocacy of a state bank. http://neweconomyweek.org/blog/mayor-montpelier-vt-tries-silence-city-employee-advocating-public-banking?utm_source=New+Economics+Email+List&utm_campaign=279c8387f6-New+Economy+Newsletter+-+October+2013&utm_medium=email&utm_term=0_6f7a9ab0ed-279c8387f6-18216661

 

Gwen Hallsmith is a prominent member of Vermonters for a New Economy, a lobby group for green, local economics.  It doesn’t help that Hollar is also a registered lobbyist for Bank of America, a very big bank indeed.

 

This is a minor political squabble in a small town in New England and it has few implications for Old England, or indeed anywhere else in the UK.  But it is still fascinating, and for the following reasons.

 

  1.  Vermont is the capital city of asset-based local economics, the antidote to the prevailing doctrine of comparative advantage, which advises cities to specialise.  It is an approach that believes that local resources can be used to regenerate an area.  Vermont is home to the Intervale, 200 acres of an old dumping ground, which is now a city garden of a dozen community farms supplying 7 per cent of fresh food to the 35,000 population of Burlington.

 

  1. Public banks are big news in the USA, a nation where half of all the money is already kept in local banks (http://www.demos.org/publication/banking-america-how-main-street-partnership-banks-can-improve-local-economies).  American radicals are looking to the Bank of North Dakota, founded in 1919 and owned by the state, as the reason it is one of the few of the 50 US states which stays in the black.

 

North Dakota is a deeply-conservative Republican state which just happens to own its own bank. The Bank of North Dakota was set up in 1919 (the same year, ironically, as Neville Chamberlain’s Birmingham Municipal Savings Bank) in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks.

The state bank provides the answer why North Dakota has no debt and also has its largest-ever budget surplus, contributing over $300 million in dividends to the state’s coffers over the past decade.

It also partners with local banks to provide the loan finance for small business lending which – as everyone knows but nobody will say publically – is no longer possible for big banks.  This is known as ‘partnership banking’.

 

This is all a long way from the situation in the UK, where there are no local banks as such, and where the CDFI and credit union market is still some way behind their equivalents in the USA.

 

But the idea of state funds being used in this way is catching on over here.  The planned British Business Bank looks as if it will work in similar ‘partnership’ ways, and a handful of local authorities are looking at related or similar projects,

 

First off the ground was the Cambridge and Counties Bank, a joint venture between Cambridgeshire County Council and Trinity Hall, Cambridge.  Next was the Bank of Salford.  Bournemouth is looking in the same direction.  So is Liverpool.

 

The implication is that all these institutions need somewhere to keep their money, and it makes economic sense to invest in local enterprise if it can be done reliably and effectively.

 

Somehow we have to remake the link between local deposits, local savings and local investment, which has been mislaid a century or so ago – and losing it has put the UK economy at a disadvantage.

 

What policy-makers need to do is to help them.

NEW ECONOMY, NEW INSTITUTIONS

David Boyle writes:

 

At the start of the coalition, in 2010, there was a great deal of talk about ‘rebalancing’ the economy.  This is not a phrase you hear so much three years on, but it was an important imperative.  It still is.

It meant rebalancing away from the UK economy’s traditional reliance on the financial sector, on speculative finance, and on the City of London.  What is pretty clear now is that this is both an urgent project and one that is going to take a generation.

It is also clear that the policy armoury to achieve it badly needs replenishing.

The solutions we have now are not powerful enough, or fast enough, to make the revolutionary change that the UK needs.  More needs to happen.

But what?  This project was launched by Baroness Kramer in September in the aftermath of the Commission for Banking Standards(she is now a minister at the Department of Transport).  It recognises that there is now a ferment of new ideas emerging in practice about building a far more diverse banking infrastructure in the UK.  We have seen credit unions and CDFIs gearing up.  We have seen new campaigns to help people to switch bank account, and new methods of helping struggling local economies to find the energy they need to regenerate – without waiting for permission or outside investment.

We have seen the emergence of an exciting new sector of peer-to-peer lending, and new ideas pouring in from around the world about how the UK might make its financial institutions more fit for purpose – which is to support and encourage local enterprise.

What has been missing is a consensus about how this ferment can be translated into actual policy levers with some chance of making things change in the way we need.

So we are enormously grateful to the Joseph Rowntree Reform Trust for the support to help this process along – both for the next election and independently of any election.  We are holding round tables, publishing reports and proposals, and talking to people at the innovative front line.

We won’t be able to change the world.  We won’t even be able to change the financial world.  But I hope we can make it easier for the emerging local economic sector, and those who are beginning to make a difference on the front line or online, to stitch together the policies we will need in a whole new push to rebalance the economy.