Establish independent regional banks, says think tank

A new report from cross-party think tank Demos proposes a dramatic shake-up to the UK’s banking system – calling for the establishment of a network of local banks with a specific remit to support local economic growth.

Finding a 'North-South' divide in the dynamism of country's SME markets, and the ability of businesses to access the capital they need to expand, Community Chest argues a new structural model for local banking is the best solution to close the gap.

It reveals how SMEs in poorer regions are more likely to be rejected for loans, and their owners face greater pressure to inject their own money into businesses compared to those in wealthier areas. In England, rejections rates for SME lending are highest in Yorkshire and Humber, the North East and the North West. Meanwhile, the areas where entrepreneurs are least likely to be forced to inject their own funds into the business are the West Midlands, the South East and the South West.

Community Chest highlights how difficulties in accessing finance can discourage SMEs from investing to grow, hampering opportunities for local economic growth and jobs creation. It explains how much of large banks' resistance to lending can be explained by the need to maximise returns to shareholders, which discourages them from supporting small businesses, which often cannot generate high returns on their investments.

Examining alternative local banking models from across Europe, the report shows how only through promoting a 'dual bottom-line', whereby banks are not only profitable but also practise a civic mission, will more SMEs be able to access the capital they need to grow and drive prosperity in their local economies.

It proposes the UK takes inspiration from the highly successful Sparkassen model in Germany, setting up the British Business Bank acts as an investor in a new network of local banks, and lending to them counter-cyclically to help enhance the resilience of local economies. Germany has some of the lowest rejection rates in Europe for SME loan rejection rates, while the UK rate is above the European average.

Importantly, while the banks would be protected to ensure longevity and shielded from exposure to wholesale financial markets, they would be operationally independent of Government, and free from political interference.

In preparing the report, Demos conducted interviews and held focus groups with a wide range of sector experts and stakeholders, including small business groups. Targeted case studies of alternative international models from Spain, Australia and Germany were also evaluated, as well as local banking initiatives in Cambridge, Hampshire and Salford.

Commenting on the report, its author and Demos' Research Director, Duncan O'Leary, said:
"The government has taken welcome steps to increase competition in the banking market but our research indicates that we need different kinds of banks, not just more banks. In countries such as Germany, banks come in a range of shapes and sizes, with local banks working alongside multinational, commercial organisations. As Britain seeks to rebalance its economy, with higher business investment and more even growth across the country, it is a model we should learn from. The British Business Bank already seeks to improve credit conditions for Britain's businesses: it could be the parent of a network of local banks in the UK."