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Banking for the many

A new public banking ecosystem would breathe new life into communities that have long been neglected.

Christine Berry Laurie Macfarlane
2 April 2019
Image: John Bannon, CC-BY-SA-3.0

Ten years ago today, Prime Minister Gordon Brown convened G20 leaders in London to rescue the global financial system from collapse. In the months leading up to the meeting, turbulence in financial markets brought the world’s largest banks to their knees and plunged major economies into recession. The UK, with one of the biggest, most complex, and most interconnected banking systems in the developed world, was uniquely exposed.

After the meeting, world leaders promised to take bold action to “repair the financial system to restore lending; strengthen financial regulation to rebuild trust; and reform our international financial institutions to overcome this crisis and prevent future ones”. A decade on, what has changed?

At the global level, banking sector assets have increased by $40 trillion while total debt has rocketed by 60%. Many experts are now warning that another crash could be just around the corner. Closer to home, the UK banking sector is still dominated by a small number of large, shareholder-owned banks. While billions of pounds are lent into the economy each year, most of this flows into property and financial markets, inflating asset prices and enriching a few at the expense of the many. Banks continue to have low levels of public trust thanks to repeated scandals, while a ruthless programme of branch closures has left many households and businesses without access to basic banking services.

In order to address these problems, it will not be enough simply to regulate existing banks more heavily, or to rely on competition policy as the current government is doing. Instead we need structural change – building a new banking ecosystem that puts the public interest first.

In a new report commissioned by the Communication Workers Union and The Democracy Collaborative, we recommend the creation of several new institutions designed to kickstart this process. Firstly, a new retail bank should be established to provide a full range of retail banking services in every community through the Post Office network. This ‘Post Bank’ should be given a public service mandate to provide access to basic retail banking services to all citizens regardless of income, wealth, or social status. It should be set up in a decentralised structure, with lending and decision making devolved to the local level, and governed by a Board of Trustees, comprising elected public representatives and relevant national and regional stakeholders. The Post Bank should seek to develop a business model of ‘relationship banking’, whereby loans are de-risked through building up strong relationships with customers, rather than relying on the availability of collateral. Alongside this, the government should take steps to cultivate a diverse ecosystem of other ‘stakeholder’ banks such as cooperative and mutual banks, ensuring that competition between these two types of bank does not become a zero sum game.

Second, plans for the privatisation of RBS should be halted, and a controlling majority shareholding should be retained in the bank. This should be used to proactively turn its business model towards one that is more aligned with public interest objectives, for example by overhauling the management team, stopping further branch closures and reforming the bank’s culture to stamp out abuses.

Finally, a transformed retail banking landscape should be complemented by a National Investment Bank and a network of Regional Development Banks. These institutions should be aligned with the government’s industrial strategy, and structured around three operational ‘arms’: an enterprise arm focused on lending to firms and cooperatives; an infrastructure arm focused on financing new energy, housing and transport projects; and an innovation arm providing high-risk, patient capital for innovators and high-tech start-ups. In order to drive structural transformation, the investment activities of these banks should initially focus on three core ‘missions’: decarbonisation and greening the economy, regional rebalancing, and industrial transformation and economic democracy.

Overall these proposals would help to deliver a major increase in productive investment and breathe new life into communities that have long been neglected. By putting the public interest before profit, these new institutions can also play a key role addressing major challenges such as climate breakdown.

Big challenges require big solutions. We can't afford to wait for another crisis to fix our broken banking system – it's time to build a new one that serves people and planet.

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