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. 

The Secret Life of Stuff

Review of Julie Hill’s new book the Secret Life of Stuff appeared in the Sunday Business Post on January 9

Economic growth is always a good thing, right?

Not according to the New Economics Foundation. In January 2010, this left-leaning British think-tank warned, in the aptly-titled Growth Isn’t Possible report, that the prevailing orthodoxy of perpetual increasing, consumption based prosperity has left the world teetering on an ecological cliff.

Instead of trying to grow further, developed economies should look to consume resources in a stable, sustainable way.

While such views are unlikely to curry favour with many captains of industry, particularly in the face of a protracted worldwide financial slump, their influence reverberates across Julie Hill’s insightful, if occasionally frustrating new book, The Secret Life of Stuff.

Dismayed at ‘‘how little we understand the complexity of the material world that surrounds us’’, Hill draws on her 25 years’ experience as an environmental campaigner to examine where the ‘‘stuff’’ that clutters our lives comes from – and why we need to change radically the way we use, and abuse, the earth’s natural resources.

The problem is dispiritingly simple: we currently consume resources around 30 per cent faster than they are replaced naturally – and the rate is increasing annually.

Hill lays the blame for this sorry state of affairs squarely on the linear economy’s disposable philosophy – ‘‘make stuff, use stuff, throw stuff away’’. Growth at any cost simply produces more stuff, more waste and, crucially, a marked reduction in our core capital asset, the natural environment.

Take newspapers. If you’re reading this in print – and you probably are – then you can try to console yourself that newspapers today are printed on recycled paper. But this system isn’t an indefinite closed loop: paper can only be recycled half a dozen times before its fibres irrevocably breakdown.

Meanwhile, trees are diminishing. Half the world’s forest has already been felled; another quarter will be gone by 2050. Almost every other material resource – metal, minerals, water – is similarly overexploited.

So what’s the solution?

Not the ‘green consumer’ trend that, Hill argues, has simply produced a niche market for putatively environmentally friendly products. In its stead the author proposes a comprehensive overhaul of how we produce and use goods and objects: zero waste.

Zero waste ‘‘represents an aspiration to let as little stuff out of the economic system as possible’’, a philosophy of renew and reuse, not chuck away and start again.

It is a simple phrase, but one with devastating implications for our accepted ways of living and, even more so, doing business.

Alongside changes in government procurement policies and tax incentives for recycling and renewable energy, Hill proposes the introduction of binding ‘producer responsibility’.

Put simply, companies should be legally responsible for the entire life cycle of the products they produce.

Before buying a stick of timber or a spool of copper, businesses would have to consider how these raw materials would be used again after their product’s lifecycle.

It is a compelling argument with obvious benefits: massive savings in energy bills, the increased preservation of natural resources and the alleviation of the effects of climate change. But there are also drawbacks to zero waste at present.

Recycling technology is, in the main, remarkably primitive, even in the developed world. Economic inducements would certainly help change this, but progress takes time as well as legislation.

Lowering the price of renewables could also invite a Jevons paradox, whereby technological advances increase demand and consumption, negating any efficiency savings.

The Secret Life of Stuff is no dry, academic treatise.

Hill takes the reader on a journey from community incinerators on the Shetland Islands, to toxic spoil pits that pollute parts of Montana via ground-breaking recycling plants on the Japanese island of Shikoku, all the while explaining where our material world comes from, and how we too often waste it.

A range of sources are drawn on to produce a well researched, cogently-argued whole.

Unfortunately, the breadth of Hill’s reading is not always reflected in her style, which tends towards the demotic and too quickly becomes predictable.

Almost every section is prefaced with an historical anecdote, some of questionable relevance, while attempts to breakup the text with invented letters and hypothetical discussions fall flat.

Nevertheless, there is much to recommend here. The Secret Life of Stuff is a mine of revealing stats and facts: our consumption of agricultural products from other countries means that each person on earth uses a staggering 4,645 litres of water a day; Americans throw away 25 billion Styrofoam cups each year; the largest aluminium smelter in Australia uses as much energy as a city of one million people.

Ignore the rather misleading subtitle, A Manual for a New Material World, The Secret Life of Stuff is a polemical , often persuasive, manifesto for reusing and remodelling the planet we already have, not designing a new one.

Hill’s is a radical challenge to our prevailing economic culture, not just a paean to eating organic and buying local.

There are limits to growth; if we haven’t bumped our heads off them already, we certainly will soon.