Why We Need More Banking, Not Less

IN THE wake of the 2008 crash, thousands of people are moving their accounts from the Big Five banks every month.

Crisis? What crisis? The immortal phrase – created by a Sun journalist, but erroneously attributed to then prime minister Jim Callaghan – helped bring down a Labour government in 1979, but could as easily have been coined to describe the shoddy state of high street banking in Britain today.

In June, a massive IT systems failure left customers of RBS, Nat West and Ulster Bank unable to access their money. Then Barclays was fined a record £290 million for its role in rigging the London interbank offered rate, Libor, the interest rate used, among other things, to determine the cost of borrowing for millions of households and businesses.

Just two days later, the Financial Services Authority found Barclays, HSBC, Lloyds and RBS guilty of mis-selling specialist interest to thousands of small businesses. The products, many of which came with huge monthly payments, had a “severe impact on a large number of these businesses”, according to the authority.

Such malfeasance is not restricted to the UK’s so-called Big Five – earlier this month, Standard Chartered agreed to pay £217m to settle allegations from a US regulator that it laundered £160 billion for Iranian clients, contravening international sanctions – but the concentration of Britain’s banking sector greatly increases the risk of corrupt practice.

Currently, HSBC, Barclays, RBS, Santander and Lloyds hold about 85 per cent of all current accounts. However, there are signs that this is starting to change. Each month about 80,000 customers are leaving the big high street banks for alternatives, say campaign group Move Your Money. Among the beneficiaries have been Triodos, an “ethical bank” which recently opened a branch in Hanover Street in Edinburgh, and Handelsbanken, a Swedish bank that doesn’t pay staff bonuses and has more than 100 branches in the UK.

Earlier this summer, the Co-operative Group bought 632 former Lloyds branches, in a move that should more than double its share of the banking sector to more than 6 per cent.

“The big question really is why more people aren’t leaving [the Big Five banks],” says Tony Greenham, head of finance and business at the New Economics Foundation. While many customers are dissatisfied with their bank’s behaviour, from deteriorating in-branch service to the plethora of hidden charges, fear and lethargy are powerful disincentives to change.

“Most people can find anything else they would rather do than switch their current account,” says Greenham, who proposes allowing current account numbers to be transferred across institutions, in the same way as mobile phone numbers, as one way to encourage switching.

An advertising budget running into the hundreds of millions is one reason unhappy customers are staying with the Big Five. Another is that most know little or nothing of banking life beyond the high street. This, however, was not always the case.

Housed in the impressive former head office of the Bank of Scotland, the Museum on the Mound in Edinburgh is designed as a glowing tribute to one of Scotland’s financial sector. But it also, rather unwittingly, tells another story, that of the massive consolidation of British banks that began towards the end of the 19th century, and lasts to this day.

The turn of the century was a period of bank mergers on a heretofore unseen scale, as Andrew Simms and David Boyle detail in Eminent Corporations: The Rise and Fall of the Great British Brands. In 1918, Westminster expressed concern about this “merger mania”, but eventually dropped the idea of anti-trust legislation. By 1920, there were just five big banks left standing.

Arguably, the model of a small number of megabanks served Britain reasonably well for 60 years – or at least was not completely deleterious – but all this changed in the 1980s, as the banking sector’s focus shifted from serving existing customers to increasing shareholder value. The 1986 deregulation of financial markets in the City of London, the Big Bang, cemented this cultural shift, with disastrous consequences.

“Banks have been driven by a different ethos, where it is all about flogging stuff to people and hitting sales targets,” says Greenham.

In the wake of the 2008 crash, which it is now apparent was as much the fault of banking cultures as it was of a dodgy subprime mortgages in the United States, banks have moved from risky investments to tapping their own customers to shore up their distressed balance sheets. While base rates have remained at historic low levels, interest on personal loans has not been reduced, greatly increasing bank profits on private debt.

Unlike the global economy, bankers’ bonuses show no signs of slowing down: last year, pay for chief executives at 15 leading US and European banks rose by 12 per cent. This followed a 36 per cent increase in 2010.

The banking sector needs increased competition, and that means more, smaller banks. But starting a new bank is not easy. When Metro, a small bank operating mainly in South-east England, opened its doors in 2010, it became the first new bank in a century to be granted a licence in the UK.

As Channel Four’s revealing fly-on-the-wall documentary Bank of Dave showed, start-up banks such as David “Dave” Fishwick’s Burnley Savings & Loan face numerous barriers to entry: from daunting legislative and administrative rules to an inability to compete with the putatively “free” current accounts offered by the big banks.

The situation in other countries is very different. In Germany, a third of the banking sector is comprised of co-operatives (or mutuals). Another third are Sparkassen, local savings banks that are intimately tied to the local economy and are very stable. These small banks operate on what is called the “church steeple” principle: loans are only made to businesses in the local area, that you can see from the church steeple in the middle of the town.

Credit unions are almost unheard of the UK (at least outside Glasgow, which has the highest concentration of credit unions in the country), but in Canada 30 per cent of the population holds a credit union savings book. This allows them to both save and take loans, generally up to three to five times the value of their savings balance.

During the UK’s “merger mania” every local bank in the country disappeared, except one, the Airdrie Savings Bank. Established in 1835, it is the only independent savings bank left in Britain. Business is booming. Last year, deposits at the bank rose by over 5 per cent; lending to local businesses increased by a vertiginous 35 per cent, far ahead of equivalent figures for any of the Big Five.

Britain needs more banks like Airdrie Savings, banks that are adapted to the economic and social needs of their area. Greenham has a radical idea to make this happen – re-localise the majority state-owned Royal Bank of Scotland.

“The prospect of selling [RBS] back to the stock market at a profit is non-existent,” Greenham, a former investment banker, says. RBS should be split up into a large number of small branches, with lending decisions made locally, rather than from a centralised head office.

“We need to make a virtue out of a necessity,” says Greenham. “The Big Five still act like monopolists. They don’t have to try too hard to keep our business. That has to change.”

This piece originally appeared in the Scotsman,  August 24.