David Boyle 13th January 2013
The year 1919 saw the Treaty of Versailles, the Amritsar Massacre and the death of Rosa Luxembourg. It was also the year when, on both sides of the Atlantic, local government decided they could benefit their areas by starting banks. That was when Birmingham Corporation’s very own bank was established by act of Parliament.
The Birmingham Municipal Savings Bank (pictured) was the brainchild of Neville Chamberlain when he was lord mayor. It grew to have 66 branches across the city, before it was subsumed into the Trustee Savings Bank in 1976.
The very same year was when the state of North Dakota decided to launch their own bank, in order to recycle their reserves into productive local investments.
The Bank of North Dakota buys into loans made by other local banks to local business, designed to make local savings go a bit further. It now has a technical term – ‘Partnership Banking’.
After almost a century of obscurity, the Bank of North Dakota is being talked about again in think-tank circles, where they have been looking for a solution to what is being seen in the USA as the core problem of the banking crisis.
This is not a problem of too little money. There are huge sums of money in the system, after all. But, say the local bank advocates, there are not enough institutions capable of lending it productively, in the way that small regional banks were originally designed to.
North Dakota’s bank has always made a profit for its political masters and, perhaps for this reason, North Dakota is one of the only overstretched US states with a balance sheet in the black.
It also explains the sudden obsession with banking in US local government. Cities all over the nation are passing ‘responsible banking ordinances’ to force the banks where they keep their money to lend more locally. Both New York City and Los Angeles are signed up already.
Seven cities in New York State alone have taken their funds from JP Morgan Chase and put them in local banks. States like New Mexico are going the same way.
This isn’t really an option for local authorities in the UK because local banking has all but disappeared. Most of their combined budget – £122bn a year for English councils alone – is still sitting unproductively in the virtual vaults of the big banks.
Some local authorities, including Hackney for example, have shifted their money slowly into the Co-operative Bank, which is now doing some business – though not necessarily a great deal – for about a third of local authorities.
Thanks to a clause in the hard-fought Financial Services Bill last year, the new financial regulator will now ‘have regard’ to the diversity of the UK banking market – so more competitors may now be on the way.
The arrival of Handelsbanken and Burnley’s Bank of Dave, not to mention the new Grameen Foundation Scotland, are the first signs of new competition for the handful of big banks in the UK.
But it is all very slow. That is why more people here are looking at the Bank of North Dakota.
The first local authority to put a toe into the banking water was Essex, which launched their Banking on Essex bank together with Santander in 2009. They closed it again 18 months later after only managing 20 loans and two overdrafts.
There were hard-fought debates in other councils at that time. Birmingham’s mayor Michael Wilkes championed the idea of a new version of Chamberlain’s municipal bank, but objections from backbench Conservative councillors meant that plans were shelved.
It is true that setting up a bank from scratch in the UK is an onerous business, which is why the handful of new banks in the UK – from Metro to Virgin Money – have bought an existing bank to avoid having to get a new banking licence.
Even so, getting through the tortuous regulatory process can cost over £30m, even before you have designed and built your own back office IT system – and gathered enough money for your reserves.
Or laboriously won approval for all your board members and senior staff.
Birmingham’s council officers came up with estimated costs as high as £200m and, as a result, managed to scotch the plans. Banking on Essex cost less than £400,000 but then they were doing little more than sticking a label which said ‘Essex’ on a bank that was actually Santander.
But, last June, Cambridgeshire County Council seems to have succeeded in breaking the pattern. Their pension fund linked up with the endowment fund run by Trinity Hall, one of the wealthier Cambridge colleges, to launch the Cambridge & Counties Bank. It has plans to lend more than £100m to small businesses over the next four years.
The pension fund alone has deep pockets (about £1.6bn), and they are confident that they can invest effectively in the small business market.
This is the key question. The big banks missed their lending targets under the government’s controversial Project Merlin, which seems to have shifted attitudes inside the government to opening up the local banking market.
If the banks are correct, and there is little demand for small business lending, then the new bank – and others like it – will find themselves called upon to fund the dodgy rejects of the big banks.
If, on the other hand, the banks are wrong, and their failures are really because they no longer understand local markets – now that decisions tend to be taken at regional level using risk software – then there is a real business opportunity here.
The new Cambridge bank avoided the problems of extracting a new banking licence from the regulator by acquiring the Pensions Bank in Leicester.
By the end of last year, chief executive Gary Wilkinson was claiming that they were on target for both loans and deposits, and revealed research that small businesses across the UK had 47,777 overdraft and loan applications rejected last year, worth as much as £2.5bn.
There is the opportunity, if it can be grasped. But there are few local authorities so far daring to grasp it.
One local bank project in Hampshire is currently talking to local authorities, but has yet to raise the development finance it needs to launch their regulatory bid.
They are organising a local banking conference called Ecobate 2013 (European conference on banking and the economy) at Winchester Guildhall, and with business secretary Vince Cable as the keynote speaker, on 6 March.
Rather than starting new banks, local government leaders are looking at ways councils can raise infrastructure funds for themselves. Collective agencies – allowing councils to borrow funds from bonds markets – have been operating in Scandinavian countries for decades, and are under development in France and under consideration in Germany and Australia.
These don’t increase total borrowing, but they do mean that councils can raise funds from pension fund investors. A project team, led by City of London councillor Edward Lord, is looking at whether similar arrangements could be developed in the UK.
The idea of local government using its money for useful investment is not new – Birmingham showed the way back in 1919. Many local authorities used reserves to provide mortgages for key staff well into the 1970s.
But the prospect of a Bank-of-Our-Friends-in-the-North horrifies some of the more conservative elements in Whitehall. Yet attitudes are beginning to change, as officials look across the Channel and see the healthy ecology of banks at every level – which the UK has now lacked for two generations.
If Cambridge and Counties Bank thrives, then the twin benefits of public sector profits and providing an effective lending infrastructure may be too much to resist.
David Boyle is a fellow of the New Economics Foundation and the author of The Human Element.
