Archive for February 27th, 2009
27th February 2009
The need for a new Welsh Bank
The other day, I explained 23 ways of moving the economic situation forward.
The fifth point that I raised was about the need for publicly owned and not-for-profit banks that provide low-cost current and savings accounts as well as low-interest loans to individuals and small businesses, and I want to take this opportunity here to explain my thoughts in greater depth.
The problems Wales faces
Wales currently faces three significant problems – the drying up of affordable mortgages for first-time buyers, the lack of normal credit facilities for small and medium businesses and a long-term negative effect on perceptions of saving.
Part of the reason for this last issue is the opacity which became associated with banks, dabbling in deals of which they had no real understanding themselves.
This is striking because we have an absence of the local and publicly-owned banks that are common in many other countries, instead concentrating our efforts into a handful of global international banks that have been at the centre of the risky and exotic deals that have proved their undoing.
A new type of institution
We need a return to ‘narrow banking’, an uncoupling of the real-world, old-fashioned savings and loan banks that keep the wheels of our economy turning, from the investment banks.
This would create a banking system that would respond better to the needs of communities and local businesses.
With little in the way of indigenous financial institutions in Wales, this is the ideal opportunity to create one or more banks in Wales, focusing on the provision of a limited set of basic financial services to the public and small business, concentrating on the needs of the Welsh economy.
Indeed, as Geraint Talfan Davies wrote in last weekend’s Western Mail, this may well be the best time to open a new institution – untainted by the toxic debts that have engulfed so many existing banks.
One of the difficulties the Welsh Assembly faces in its attempts to deal positively with the current mess is that there is no particular vehicle that it can use, and it therefore seems logical that the Welsh Assembly Government should have the option to have a lender of last resort and an institution that is potentially subject to the policy priorities of the Welsh Assembly Government, so that, if this situation ever occurs again, the Assembly may make its own decisions.
Examples
Certainly a model that is worthy of consideration in this context is that of Germany, where there are local savings banks (Spaarkassen) rooted in local communities and where some of the services are provided by the Landesbanken, and backed by the German Federal Lander. Spaarkassen have been unaffected by the financial crisis and in many cases have increased their lendings.
Germany, like Switzerland, has a mixed-economy banking sector, with private, co-operative/credit union and publicly-owned. The Cantonal banks in Switzerland provide local finance for the Swiss cantons and are owned by them, but this hasn’t stood in the way of private banking.
Public Support
It’s clear that there’s public support for this sort of bank. Only the other day, the Financial Times survey showed that 81% of people supported the idea of local savings banks similar to the Spaarkassen.
We do also have a history of this in the UK, with the old savings bank movement, which became the TSB, the Post Office Savings Bank, National Savings Back, and municipal banks, with Birmingham, the site of the first municipal bank back in 1917, considering a private Bill to open a new bank. Here in Wales Ceredigion are apparently following the same route.
It has to be said that there is a major gap to be plugged in terms of business lending in Wales. Finance Wales provided just 110 loans in 2008 and are forced to be 4% to 10% above European reference rate for UK, and therefore not a competitive answer for small business in Wales. This leaves a clear gap in terms of normal business banking.
What it could do
There are probably two distinct roles at least that need to be considered – retail lending to individuals and commercial lending to small and medium sized companies.
Typical services would include:
- current account with cheque writing, direct debit and standing order facilities
- savings accounts, including ISAs
- credit cards
- ATMs
- personal loans
- mortgages
- small commercial loans
These banks would be linked into the plumbing system of the wider banking system, such as ‘Swift’, to allow for money transmission, interbank transfers etc.
How to fund it
There are a number of ways in which such a bank could be financed, all of which involve the public sector. These would include:
- the deposit of part of the surplus (reserve) cash of either, or both, of the Welsh local authorities and the Welsh Assembly Government, avoiding the need to invest and give the benefit of our money to outside banks, such as those in Iceland.
- deposits by retail customers. A branch network may be expensive, but, as a starting point, it might be possible to use facilities in council offices, or as an internet bank.
- borrowing through issuing medium and long-term bonds. These would require bonds to be guaranteed by a creditworthy entity, such as the Welsh Assembly Government and possibly local authorities. This would enable the new institution to provide loans by raising funds with a similar maturity. There may be complications with European law, regarding competition, but since 2005, papers issued by the Landesbanken no longer benefit from the guarantee of their relevant Lander.
Giving borrowing powers to the Welsh Assembly Government, a principle supported by the Labour Party in Scotland in their submission to the Calman Commission, would be a great boost to this new institution, and I call on the government in Westminster and the Welsh Assembly Government to discuss this issue fully and hopefully implement it before too long.