The importance of getting banking reform right is pretty obvious – banks are the engines of a modern economy. That’s one reason the last Labour Government bailed them out during the 2008 credit crunch.
But IMF calculations reveal the UK had to pledge more support to its banks, as a percentage of its GDP, than almost any other advanced economy. Our £1.28 trillion bailout represented about 88 per cent of GDP. That’s more than twice the US equivalent and accounts for almost one fifth of the global £6.8 trillion total.
The comparatively eye watering severity of the UK bailout is linked to our almost unique banking set-up. We have a handful of commercial banks (Barclays, HSBC, RBS and Lloyds), which account for around 73% of our banking mix. Four commercial, high-risk leviathans so large and so intertwined with the UK economy they’re considered ‘too big to fail’.
And yet despite billions of state subsidies, the Big Four have proved incapable of getting cash out into the ‘real economy’. Even with £23 billion of taxpayer support between July 2012 and January 2014, banks increased their lending by a mere £3.6 billion. A market failure if ever there was one.
To try to remedy this and reduce the risk of another banking crash the Party’s Policy Review is proposing a raft of banking reforms. Some make sense. However, too much focus is on the number of additional commercial banks (challenger banks) and not enough emphasis on diversity of scale and ownership. We desperately need different types of bank in our economy, not just more of the same.
One of the few exceptions to this is the eye-catching proposal for a British Investment Bank (BIB). Under Labour’s BIB plans six so called ‘Sparks’ (derived from the German system of self-owned ‘Sparkassen’ banks) – state owned regional investment banks – will be charged with boosting growth is specific areas.
But why settle for just six regional banks? Surely having a network of hundreds of local BIBs spread throughout the UK, each knowing intimately the business ecosystem in their neighbourhood, would be more effective? Small banks that bring back the personal, localised banking SMEs have been crying out for, shifting capital to where it is most needed in our local communities.
That’s why RBS and some of its network of more than a 1,000 branches – branches we the taxpayer already own – should become part of the BIB. Why settle for six when we could have 600?
As for the rest of RBS’ network of branches, let’s use them to create a more diverse banking ownership model. The remaining RBS branches could be used to set-up hundreds of local mutuals, credit unions and co-operatives that currently account for just 3% of UK banking. As has been seen in the German economy, banking diversity and competition provide the best protection against 2008 style economic shocks.
Finally selling off RBS’ superfluous departments – namely the risky, speculative casino banking – could raise an estimated £19 billion worth of capital. Capital that could be invested into the real economy via the BIB’s former RBS chain of banks, creating thousands of high quality jobs.
At the heart of Labour’s 2015 offer will be the pledge to fix our broken economy. Key to that will be rebalancing the economy. And key to that will be getting capital out of the speculative asset bubble of London and the South East and into cash starved regions like my own here in the East. Utilising RBS like this gives our economic plans the best chance of success.
We all want to see a decent return on our collective investment into RBS. Just as we want to maximise the ability of our banking system to properly support the British economy.
The alternative, the Coalition’s plan, would be to put RBS back into the hands of those who got us into this mess in the first place. A plan that would see the taxpayer lose an estimated £10 billion.
Labour can do better than that.
Originally posted in LabourList.org on the 13th July 2014 at: labourlist.org/2014/07/if-our-plans-for-a-british-investment-bank-are-to-succeed-then-we-need-to-break-up-rbs/