|NEF REPORT - UK Coalition partner suggests one way how banks could be brought to fulfil their original function.
|The report on Banking failure and how to build a fit financial sector says that instead of serving ordinary people and businesses banks have simply become too big and remote that that basic service is a sideline. It worns that branches are still closing and those that remain have no local managers and deal with loan applications on the basis of abstract national and regional formulae. The current shape and business model of banks today have rendered them ‘unfit for purpose’. returning the banks to scale, investing in communities and supporting small businesses. I.O.U.K. makes the case for a radically different approach to banking. It argues for smaller, more specialised and localised banks, which are transparent about their patterns of lending. Financial inclusion must be prioritised, the Post Office should be the home of a new, publicly-owned People's Bank, and small businesses, the bedrock of the UK economy, should be supported both financially and within legislation.
Break up the banks to restore lending and revive the economy from the bottom up, says think tank
Economic rescue efforts - including quantitative easing - will not work until the fundamental problem that Britain’s banks have become "unfit for purpose" is addressed, says nef (the new economics foundation).
In a report published today, Tuesday 10 March 2009, - the day the British Bankers Association chief is to answer to a parliamentary investigation of banking supervision and regulation1 - nef argues that the shift in the shape and business model of banks over the last generation helped both cause and perpetuate the present financial crisis.
It calls for a radical rethink of Government strategy, to rebuild a financial sector that is fit for purpose.
Instead of throwing good money after bad, Government should:
- de-merge the big banks
- separate retail banking from corporate finance and securities dealing
- support community finance initiatives and small businesses, who will be the drivers of the recovery. Small businesses provided 59% of private sector jobs in the UK in 2007.
IOUK: banking failure and how to build a fit financial sector, analyses the behaviour of the UK banking sector. Banks have withdrawn from the heart of communities, sidelined their basic business, lost touch with the real needs of their customers and become structurally unable to serve them, it says. While flooding the economy with inappropriate credit they contributed to a financial drought in disadvantaged areas and starved small businesses of the credit they needed to survive.
And the Government's rescue attempts have so far failed. Despite virtual nationalisation and a £37bn bailout of the biggest banks, the Government seems powerless to force banks to lend appropriately. The Enterprise Finance Guarantee scheme which replaced the Small Firms Guarantee Scheme has failed to kickstart lending (despite Lord Mandelson's claims in an announcement slipped out quietly on 20 February in response to media criticism3) and is weighted in favour of larger firms.
Yet a "sleeping architecture" of a more robust local financial infrastructure exists in the credit unions, community finance and local enterprise schemes that are working on the frontline of financial exclusion. The paper includes case studies of viable businesses failed by the banks but supported by this parallel infrastructure.4 This sector should be supported and a UK Community Reinvestment Act be brought in to force banks to partner with them.
"The Bank of England has reached a dead end with interest rate cuts and the decision to flood the economy with £75 billion of new money through "quantative easing"; is just another form of bail out. The Government is in denial if it thinks we can go back to business as usual; that's what caused the crisis. If banks became too big to let fail, how can the answer be to make even fewer banks even bigger and keep channelling all the funds through them? We need to bring banks back to their original function, break them up and return them to a scale where they are in touch with the communities, people and businesses they should have been serving all along." said Sargon Nissan, Business and Finance Researcher at nef and co-author of the report.
1 Angela Knight, British Bankers’ Association and Adrian Coles, Building Societies Association are scheduled to appear before the Lords select committee on economic affairs’ inquiry into banking supervision and regulation. http://www.parliament.uk/parliamentary_committees/lords_economic_affairs.cfm
2 Department for Business, Enterprise and Regulatory Reform (2007) Statistical Press Release http://stats.berr.gov.uk/ed/sme/smestats2007-ukspr.pdf
3 Department for Business, Enterprise and Regulatory Reform Press release, 20/2/09: Lord Mandelson announces Government guaranteeing more than £1m loans a day, http://nds.coi.gov.uk/environment/fullDetail.asp?ReleaseID=393203&NewsAreaID=2&NavigatedFromDepartment=True
4 Eco-Logic UK was a promising new supplier of cutting-edge water-saving technology that was just taking off when its bank decided to stop supporting it. Aston Reinvestment Trust, an independent community development finance initiative (CDFI) in Birmingham, stepped in and provided a bridging loan that saved the company from job cuts and possible closure.
Created: 11/03/09. Last changed: 11/03/09.
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