Competitor banks are needed to shake up the system

Competitor banks to shake up the system should primarily have community interests as its focus. What Miliband is signalling at today is a good first move.

What Ed Miliband will say about banks today should please all sides of the political divide – especially when George Osborne keeps pinching his ideas (minimum wage increase, caps on credit etc) – but predictably there is a contrarian opposition.

There is an inevitable section of the chattering classes for whom any effort to intervene in markets is in and of itself a bad move – that it smacks of Marxism. Remember what Cameron and Osborne called Miliband when he suggested using state tools to add competition in the energy markets?

But Miliband’s idea to get banks selling a number of their branches in the name of competition is hardly a whacky idea from the footnotes of Das Kapital. In fact, for inspiration it looks to the US where banks are limited to holding no more than 10 per cent of retail deposits (compare that to the 23 per cent Lloyds owns).

There is a lot of talk at the moment about creative governments replacing ‘big’ government. Using the state apparatus to intervene when markets are negatively impacting upon consumers and innovation is a perfectly sensible idea – one which Ed is nodding to today.

Far be it for me to guess the outcome of a future report by the Competition and Markets Authority – which Miliband has said he will commission to write a report on breaking up the banks if he is elected in 2015 – but I think it is a reasonable assumption to make that injecting more competition into the banking system will produce better opportunities for small and medium sized businesses to access finance.

For years politicians have hoped more funding for small businesseswould magically happen or be the eventual outcome of pleading. Ed Miliband has been long awake to the idea that intervention is needed to shake up the market and make sure SMEs do not miss out. (It should also be noted that Miliband has been talking about obliging the ‘big five’ to sell off branches since 2012).

Now Miliband is looking toward competitor banks. For me these have to be community banks – the real corrective to a lack of financial democracy in the UK. Local-owned institutions where lending decisions are made by people who are invested in the local community. Members of the bank actively have a say over what kind of funding goes to businesses that will set up in the towns they live in – a world away from allowing big banks to make those decisions for us.

As we’re looking towards the US for inspiration, Miliband should also begin to talk about having responsible banking ordinances. Each depository in the UK should provide an annual statement of community investment goals including the number of small business loans, mortgages, and community development investments made. This would give us a clear understanding of the shortfalls in access to finance that many SMEs in the UK have complained about.

We are stifling good opportunities for fair finance in the UK by trusting big banks who dominate the market to do things for the common good – forgetting that they are first and foremost indebted to their shareholders, not the communities they set up shop in.

It is now time for a correction to that. Miliband is taking stock of the good work in the US to stop banks being too big on the high streets. A reemergence of community and cooperative banks with obligations upon lenders to demonstrate their community investment is something that can coincide with his proposals.

Competitor banks to shake up the system should primarily have community interests as its focus. What Miliband is signalling at today is a good first move.

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