Economic Policies for an Incoming Labour Government – Part 7

Economic Policies for an Incoming Labour Government

By Bryan Gould and George Tait Edwards

Part 7: The Community Interest Bank Key to Local SME Development

Despite the provision to the banks of huge sums by way of Quantitative

Easing, very little of that money has found its way into bank lending for

productive investment. The excuses trotted out for this failure include the

age-old claim by British banks that the comparatively low level of their

lending to business does not evidence any reluctance to do so, but merely a

shortage of demand – or, to put it another way, a shortage of suitable

projects on which to lend. But no sense of this can be made unless we

know the terms on which the banks are offering to lend.

And that is precisely, of course, what we are not usually allowed to know.

The banks have traditionally been very coy about the terms they offer. But

the Bank of England has recently required the British Banking system to

make returns showing the extent and the terms of lending to enterprises.

The information that is now available shows that, by comparison with other

and more successful economies, our banks lend over a shorter term – in

other words, the money has to be repaid faster. The average term loan is

now under two years, with a repayment rate of about 65%. This means

that the annual repayment costs of bank loans for British firms over the life

of the loan are much higher, the adverse impact on cash-flow is therefore

more severe, and the need to make an immediate return on investment

(and a quick boost to profitability) is much greater.

Annual repayment costs that are several multiples lower than British

equivalents are a large part of the reason for the greater amount and ease

of bank borrowing enjoyed by businesses in, for example, Germany and

Japan, and in the new powerhouses of China, Korea and Taiwan – and that

is, of course, why they are able to buy up and make a profit from our failing

assets.

This is the origin of the much-lamented British disease of short-termism.

Short-term cash-flow or liquidity is at least as important to British firms as

longer-term profitability; indeed, it is literally a matter of life and death.

It is a factor that both inhibits the willingness to borrow (and therefore the

access to essential investment capital) in the first place, and – if the loan is

made – greatly increases the chances that it cannot be repaid in accordance

with the loan period and terms insisted upon by the banks.

If, as is all too likely, a business borrowing on these terms runs into

difficulties before the return on the investment funded by the borrowing

becomes available, the news gets worse. British banks, unlike their

overseas counterparts, show little interest in the survival of their business

customers. Their sole concern often appears to be to recover the loan and

interest payments due to them over the short period specified in the loan

arrangement. If that means receivership or liquidation – even if the

business had a good chance of survival were the investment plans funded by

the loan allowed to proceed – so be it. The banks can congratulate

themselves not only on the return of the loan and other payments due to

them sooner than if the business had been allowed to survive but also on

the money to be made from the disposal of the assets (sometimes to foreign

buyers) through the receivership process.

Previous attempts to improve the investment funding of SMEs have failed in

the United Kingdom, in the face of well-funded bank opposition to any

changes to improve the existing situation. The current concentration of 84%

of UK bank savings in six banks and the absence of public local banks of the

Spakassen type is largely responsible for current failings.

Bank branches in the UK at present act as facilities for collecting local

savings and then channelling them almost entirely into London; there is little

direction of such savings into local SME investments. The

millions of VAT-paying SMEs in the UK receive virtually no support from

the branches of the UK banking system except for the standard retail

service of a money transfer system.

By contrast, the more successful German economy has seven regional

banks, 453 Sparkassen (or local savings banks) and a network of 12,600

branches to provide SME loans from German savings. Each Sparkassen – all

453 of them – concentrate on providing business loans to SMEs in the area

where it is located, and each has an interest in, and commitment to,

ensuring the economic success of its native village, city or region.

Britain has nothing remotely similar nowadays, but it had such a system

until the 1880 Bank Amalgamations were put into effect, so destroying

“country banking” and paving the way for the English Clearing Banks. As Professor

Glyn Davies said in his 1979 evidence to the Wilson Committee “If Britain

had had the financial arrangements it has now at the time of the industrial

revolution, that revolution would have been still-born.”

This situation is no longer tolerable. If we are to prosper so as to compete

with powerful overseas competitors, the banking system must be reformed.

Fresh legislation should be enacted to require British banks to operate

mainly in just one of four separate categories – as retail banks, mortgage and

consumer credit banks, merchant banks, and investment credit banks. At the level of the local

community, community interest credit banks,

having the function of supporting and developing all of the local SMEs,

should be created to fulfil that function.

The Creation of Community Interest Credit Banks in Britain

The continuation of the existing banking arrangements, in which the

merchant bank gambling function is a legally allowable integrated division

of Clearing Banks with the rest of their banking business, is not a safe way

forward for the British economy, as Mervyn King has regularly warned us all.

That was the major cause of the credit crunch, because that structure

enabled British Banks to gamble with the savings and the circulating credit

of the UK on the international money, stock and bond markets. The “clever”

re-packaging of poor quality US housing debt, with the mistaken sale of

these mortgages as good quality loans when they were not, was the main

factor in causing the credit crunch.

The six major UK Clearing Banks give no priority whatsoever to providing long-term capital in

relatively small amounts to the 4.85 million SMEs of the United Kingdom.

There is not a single financial organisation in the UK which has the

objective of collecting financial savings and providing it, as required, at

local level to those millions of inventive and innovative local SMEs.

This has been the major conclusion repeatedly found by a number of high-powered

reports, most recently from the Committee to Review the Functioning of Financial Institutions

(successfully renamed the “Wilson Committee” by the British Clearing Banks

so as to imply that report was just a socialist recommendation) which emphasised

the need for patient, major long-term funding for British industry.

The industrial revolution was born from the commitment of local and

“country” banks to the SMEs which then grew into major industries.

All successful economic developments in all countries – in the UK’s

industrial revolution, in the USA, in Germany and in Japan – have depended

not just on the major industries but on the millions of SMEs

which continually provide the wellspring of small-scale services and

manufacture without which major national industries could not flourish.

It is essential that hundreds of local CICs with thousands of branches are

established throughout the United Kingdom. These local CICs should have a

“local first” commitment to the success of local SMEs which should be

provided with the funds required to provide the liquidity, working capital

and plant and equipment investment to improve their commercial

operations.

These local banks could be quickly provided by the nationalisation

of the Trustee Savings Bank and its local branches, which could be

regrouped into quasi-independent local-first CICs committed to the success

of the SMEs and industries in their local area.

© Bryan Gould and George Tait Edwards 2015