• Economic Policies for an Incoming Labour Government – Part 8

    Economic Policies for an Incoming Labour Government

    By Bryan Gould and George Tait Edwards


    Part 8: The Re-Establishment of British Banks Along Four Main Functional



    As previously remarked, the continuation of the existing banking

    arrangements, in which the merchant bank gambling function is integrated

    within the rest of the banking business, is – as Mervyn King has regularly warned

    – not a safe way for the British economy to proceed. A major re-structuring

    of the British Banking sector is required, so that each bank is required to decide

    whether its primary function is that of a retail bank, a mortgage and

    consumer credit bank, a merchant bank or a local community investment

    credit bank.

    Retail banks will collect local savings and provide a banking service to local

    people and industry, providing the money-handling service which enables

    wages and salaries to be paid and all other transactions between buyer and

    seller to be carried out. Retail banks will be encouraged, if they wish, to

    develop close relationships with local industry (as is the norm in Germany)

    and to develop an informed view of the prospects of their local enterprises.

    Retail banks with many local branches will be invited to consider becoming

    local SME investment credit loan banks as they wish. Local authorities will

    be invited to consider setting up Local Authority Banks to help support their

    economic development. Government guarantees will be available for the

    savings and credit deposits in retail banks of up to £200,000 per individual,

    but it is very unlikely such guarantees would ever be required.


    Investment credit banks will have the primary purpose of extending long –

    term loans at an interest rate of 4% pa over terms of between ten and

    twenty years to British-based SMEs. These banks will have the ability to rediscount

    their business loans up to the official re-discount limits set under

    the “window guidance” at the Bank of England. Such banks will be

    completely backed by government. SMEs and other companies taking out

    loans and the personnel employed by these companies will be expected to

    change their bank so that the loans granted, the wealth created in company

    accounts and the wages paid will all initially, and perhaps ultimately, be in

    the loan-providing bank. Savings kept in investment credit banks will have a

    structured rate of interest so that short-term one-year savings will have an

    interest rate of 1% and savings over five years will be offered an interest

    rate of inflation plus 1% and thus effectively would be better than inflation-proofed.


    Mortgage and consumer credit banks would have the major function of

    providing mortgages or consumer credit at relatively low rates of interest.

    The mortgage section and consumer credit section of any bank should be

    legally operated as a distinct entity within any bank which provides any

    other functions. Government guarantees will be available for the savings

    and credit deposits in mortgage and retail banks of up to £100,000 per

    individual, but again it is very unlikely such guarantees would ever be



    Merchant banks will exist as entirely separate free-standing institutions not

    associated with any other bank and may attract such savings as may be

    commensurate with their level of risk. The risks of complete loss of savings

    must be clearly explained to merchant bank savers, and no government

    guarantee for any savings placed in a merchant bank will be available.

    Merchant banks will be obliged to keep reserves, probably in the range of

    10%-20% of total bank assets, commensurate with the gambling risks they

    undertake, as determined by the Financial Services Authority.


    These measures would go a long way towards constructing a banking system

    that provides proper security and guarantees to savers, that truly serves

    the public interest and that in particular provides much-needed investment

    finance to Small and Medium-Sized Enterprises.


    © Bryan Gould and George Tait Edwards 2015

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