Opinion: The Case for Community Banking

Lloyds Bank, Leighton Buzzard - Some rights reserved by dlanor smadaThere are signs that the banking crisis may be coming to an end. The old TSB has re-emerged, Lloyds may be returned wholly to the private sector. William & Glyn’s may also re-emerge with investment, from amongst others, the Church Commissioners for England.

So, if we ignore RBS, the banking sector looks like it can get back to solid day-to-day retail banking, can’t it? Well, not quite. Retail banking is now disappearing from our local communities with only local credit unions filling the gap.

Now is the time for a more diversified banking structure in the UK. However, the chances of this took a step backwards this week with the Co-operative Bank placing adverts in the national press to re-assure its customers that it will continue to be an ethical bank. This follows the discovery of a £1.5bn hole in its balance sheet and the news that the Co-op Group would lose overall control of its banking arm following a proposed financial restructuring. However, I fear we are seeing the end of the Co-operative Bank as we have known it. It has already announced plans to reduce its branch network by at least 15% by the end of next year.

Unfortunately, we’ve heard it all before. Latest figures from the Campaign for Community Banking Services, published in September, show that in the last ten years just under 2,200 bank branches have closed. Branch closures by the ‘Big 4’ have taken place at an increasing pace since 2009, with a net 647 closures to date. Some closure activity paused in 2013 for strategy reviews but indications are that further significant branch closures are now in prospect.

Does it matter that our banks are deserting local communities? Well, yes it does and for a number of good reasons:

  • Successful and sustainable economic growth requires a local banking system;
  • A banking service should provide not only counter services but also access to credit based on local lending decisions and to locally-based banking advice;
  • Closure of bank branches can significantly reduce footfall in high streets, leading to reduced retail turnover which then has an impact on the sustainability of retail space in our towns;
  • Small businesses still need access to bank counter services – otherwise they have to travel large distances to deposit cash etc.

The ‘Big 4’ are voting with their feet, driven by pressures on profitability and increased capital requirements. They are abandoning local communities. Now is the time to look to alternative models elsewhere in Europe and in the United States.

The truth is that UK banking has been driven by profit motives to provide large loans to financial institutions for quick returns, rather than putting the same money into smaller firms, which would create more sustainable economic growth. In contrast, both Germany and the US have strong locally-based banking systems, which are more likely to lend to smaller businesses. For example, Germany has a network of community Savings Banks (Sparkassen). Here in the UK we have seen the difficulties of doing something similar – Burnley Savings & Loans (‘Bank on Dave!’) as featured on Channel 4, illustrated the issues.

We need to change the banking system to ensure that we have many small, thriving local banks and banks that think locally. We need to provide the right incentives to the banking system, whether through legislation, reform of the banking sector, credit guidance or laws about data disclosure. A good one for the 2015 Manifesto?

* Selwyn Runnett is Chair of Carmarthenshire & Pembrokeshire Lib Dems

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9 Comments

  • I’d like to hear more detail on _how_ we should change the banking system to ensure this.

    Because while it sounds like a great idea, I’m sure there will be negatives to go with the positives, and I’d like to be clear as to what exactly is being proposed, so we can have a proper debate about it.

  • Branch closures aren’t necessarily a bad thing, it is how they are done is the problem.

    Currently, there is much redundancy in the branch network, with each bank operating it’s own branch network. Compare this to the mobile phone networks, whilst there are several major operators, dig below the surface and we see that much of the ‘branch’ infrastructure is shared, reducing costs for all. Similar parallels apply to BT’s broadband network and the unbundling of the exchanges.

    Yes bank branches are different to mobile phones and BT exchanges in that people and physical transactions of monies are involved, but it shouldn’t be that difficult for banks to come up with an unbundled branch model that benefits all – perhaps I need to formalise the outline solution I’ve just roughed out and see if there are any takers…

  • Simon McGrath 5th Nov '13 - 1:29pm

    The sentiments in this piece are admirable but I am not sure the points really stand up.
    Branches are closing for the very simple reason that very few people have the need to go into them anymore. When Captain Mainwaring was managing the Walmington on Sea branch his customers has to go in to cash cheques for example – now we use ATMs. Many other transcations which previously had to be dealt with in person can now be done over the net or by phone – the same trend is reducing the number of branches is seen in the US.

    We certainly need to increase the competition in the banking sector – but the barriers to entry are frequently those erected by regulators who (not unreasonably) set a high bar for anyone who wants to take deposits.

    We should also not ignore the potential for competion and new ways of making business loans to come from on line new entrants – ironically the most succesful new entrant in the finance sector in recent years -Wonga – has become the target of politcal attacks.

  • Matthew Huntbach 5th Nov '13 - 1:49pm

    The sentiment is nice, but the reality is that small-scale local institutions are not able to compete with the efficiency and range of products that a larger scale institution can provide. It was not that long ago that we had quite a range of small local Building Societies, but most of these have disappeared, generally through merger with bigger ones, often the merger is forced because the small ones were going down due to being unable to compete and the merger was really a rescue.

    It’s been suggested that Credit Unions should do the job that Wonga does. Nice sentiment, but completely unrealistic. Wonga and similar companies lend at very high interest rates to people who have a very high chance of defaulting. They have developed sophisticated structures to assess risk, and they require a large enough national structure to balance it out. A local Credit Union just can’t do that, and if it were to try it would very soon be brought down by bad loans.

  • Simon McGrath 5th Nov '13 - 2:27pm

    @Matthew – the interest rates quoted for Wonga are very misleading , becuase they take into account admin charges which a normal bank loan doesnt. The default rates at Wonga are actually very low – around 7% ,becuase as you say they have very sophistcated credit assesment techniques.

  • Leekliberal 5th Nov '13 - 7:08pm

    Don’t forget the mutual Nationwide, the biggest building society, whose Flexaccount current account is highly thought of by consumer organisations and myself as I have banked with them for the past 12 years!

  • Simon Banks 6th Nov '13 - 10:57am

    Roland: I like your idea. After all, ATMs have mostly gone down this route. Simon and Matthew – yes, but some closures like those that will now be made of Co-op Bank branches, are driven by bad management and over-reaching in other sectors.

    Yes, more business is done on-line or by phone, but plenty of people don’t like to do this, partly because of the contrast between Byzantine security and simple, accessible face-to-face services and partly because of fears about security breaches. Older people are heavily represented in this group and a high proportion of them also lack their own vehicles. The impact of bank closures in medium-sized towns and cities (say Colchester and Chelmsford in Essex) is not too serious and people can vote with their feet there; but in small and struggling towns such as Harwich or smaller and prosperous ones like Manningtree, it’s a big blow to many people.

    I’d think it was hardly controversial that the big banks are not good at responding to small customers’ needs whether they’re individuals, local charities or SMEs. So Selwyn raises a reasonable question: could something else plug the gap? What this discussion lacks so far is any comparison with other countries. I believe something like community banking is much better established in some of them.

  • I agree that this is definitely something that should be in the 2015 Manifesto but I’m not so confident that the banking crisis is coming to an end. Rather Osborne has just found new ways of sweeping problems under the carpet.

    I agree also that banks should provide “access to credit based on local lending decisions and to locally-based banking advice” but that’s something they’ve NOT done for several years.

    Rather than pay relatively expensive bank managers with the skills and experience to make such decisions they realised they could cut costs by centralising such decisions and computerising them using credit scoring techniques. The problem is that this just doesn’t work for the real world complexity of business lending but it does work for property lending (and note that much so-called ‘business lending’ is in reality just lending that happens to be to a business but which is secured on property – often the proprietor’s home – rather than that business’ future earnings). With property prices rising steadily (driven in part by the flood of easy finance computer-scored credit provided) this seemed like a much easier and safer bet than actually lending to businesses as such. But, of course, it wasn’t as events have shown.

    One possible solution would be to force banks to rebuilt their relatively expensive lending-skills base by requiring them to LIMIT the proportion of their total lending they are allowed to secure on property and then decrease that proportion by, say, 10% each year until it’s reached a sensible level.

  • Interesting that no one seems to care that the banks are still breaking various regulations, and being fined huge sums by national and international regulators while the chief executives who oversee such rule breaking continue to recieve their salaries and even bonuses. The fines are instead paid by customers, employees and shareholders, and one way we see this is in the continued loss of local branches. How can anyone welcome a “return to normal” with this level of irresponsibility, if not criminal behaviour. WHat hope do we really have of a return to honest management?

    The closure of a local branch makes little diference where alternative branches are a short distance away, but in more remote areas customers are forced to use electronic communication, if it is available and reliable enough to connect to the bank’s impatient and very high speed systems. So far the famed “internet banking” does not work here – I have tried.

    And then there is the option of call centre banking – if you have an hour or two to spare. To achieve this miracle you have to have endless patience a clear voice, a pure RP English accent (even if the call centre employees don’t) and know exactly which options you want before you pick up the telephone. And woe betide you if husband and wife operate a joint account. You need to take turns going through security questions before anyone will let you ask them for anything. THough the call centre may be extremely noisy, your house/office must be silent as a tomb.

    But of course, I might be with the wrong bank……..

    But doesn’t the closure of local branches discriminate against the elderely, disabled, and those who cannot afford computers and telephones. It also discriminates against tourists, students, and temporary workers all of whom may not be living in an area long enough to set up the necessary paraphanalia to connect with their bank. All these people used to be able to walk into a local branch, (if it was open when they were not required to be at work etc) and transact their business. With the closure of local branches a large number of bank customers will have to work a lot harder and pay a lot more to remain in the system.

    It might be profitable for the banks to close branches, but from a political point of view we should not be pleased by the creation of another deprived and angry underclass of people who justifiably feel themselves to be abandoned by the system. Why would they vote Liberal if the Liberal Party stands idly by while this facility is withdrawn?

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