Banking was already broken before the crash

Our guest writer is Tony Greenham, programme head of finance and business at nef (the new economics foundation)

The Future of Banking Commission’s report, published over the weekend, is an excellent document in many respects; the government should implement all 39 recommendations. This would be a promising start in building a banking sector that serves economy, people and planet but it would leave the job unfinished.

The report deals comprehensively with the issues of structure, regulation and the culture and ethics of banks. However, it stops short of openly recognising and addressing three key failings of the UK banking system that existed even when CDOs were mere glints in the bankers’ eyes.

First, there is nothing here to address financial inclusion. Despite progress since the introduction of basic bank accounts four years ago, according to HM Treasury some 890,000 adults still have no access to a bank account of any kind, and 1.75 million have no current account.

This matters because functioning in our modern cash-less economy without a bank account can cost £1,000 in transaction charges and loss of direct debit discounts on utility bills. The problem is mentioned in four short paragraphs on page 53 of the report, but no solutions are offered.

Furthermore, our research shows that as many as nine million lack access to affordable credit, finding themselves reliant on exhorbitant loans from doorstep lenders. Neither is there any consideration of the continued programme of branch closures and the impact of this on access to finance and the economic health of local high streets.

Second, the tendency of capital to ‘flow to the top’ in a highly centralised and concentrated financial services industry is ignored. Real innovation, creativity and job creation happen in small businesses (some of which then go on to be very large businesses), but as the Cruickshank Report identified in 2000 there has long been a lack of effective competition between a few dominant players in retail banking.

Within these giant universal banks, capital has flowed away from the hard slog of assessing and monitoring small loans to businesses, which requires humans rather than computers if it is to be done well, toward large corporate lending on property or corporate takeovers.  Of the £102bn net lending to UK business in the four years to March 2010, a staggering 78% was to the real estate sector.

If our banks do not possess the skills, local knowledge, patience and physical presence in local communities to provide well judged finance to small and start-up businesses, then no amount of beating them with a big stick to increase their lending will come to any good. Why not let other institutions in to do the job?

Finally, there is no attempt to step back and consider the bigger picture: does our financial system deliver activities, from insurance to savings and lending, that are socially and environmentally valuable? Or at the very least, that are not socially or environmentally destructive?

So reforming the existing institutions that so spectacularly failed the country is only half the story. A community reinvestment act, along the lines of the successful US version, will help encourage the recycling of savings back into disadvantaged areas.

And we need new institutions to create a resilient and diverse ‘ecology of finance’ for the 21st century: a Post Bank to provide universal banking through a comprehensive branch network, a Social Investment Bank to seed fund the community development finance sector, a Green Investment Bank to provide the specialist expertise and dedicated capital to fund the UK’s low carbon transition, and a reinvigoration of the mutual sector – that currently neglected financial innovation of the industrial revolution that we now see clearly has stood the test of time.

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