Earlier this year David Cameron declared his support for ‘social investment banks’ to encourage social entrepreneurs, who he hopes will play a big part in fixing ‘broken Britain’. He should go much further and establish a new type of high-street bank – a saving and enterprise bank – to compete head on with the big corporations that dominate the industry at present. Banks that combine social and economic objectives have worked well in Germany for many decades.
They would serve three main purposes. First, they would be safe homes for the savings of ordinary people who are trying to work and save their way to independence. Second, because they would be required to invest in local enterprises only, they would help to reinvigorate business and overcome their dependence on international corporations that withdraw loans at short notice and impose excessive charges for borrowing. Third, by investing in productive enterprise they would encourage a renewal of responsible proprietorship, a natural evolution of Mrs Thatcher’s strategy of encouraging a property-owning democracy.
Above all, the creation of saving and enterprise banks would encourage small and medium sized enterprises, long recognised to be the source of inventive dynamism. It would overcome the shortage of finance for such ventures, a problem acknowledged since the 1930s and for many years called the ‘Macmillan gap’ after the 1931 Macmillan report on the financing of business, and today called the ‘equity gap’. In addition, it would reform the major banks more effectively than tinkering with the powers of the FSA or the Bank of England. Creating viable rivals for bank deposits would force the major commercial banks to change far more effectively than any directives from Whitehall.
The model is the German savings banks. In 2007 German commercial banks only held 29% of total bank assets, co-op banks owned 12% and the market leader was the savings banks with 34%. About half of German GDP is produced by small and medium-sized firms – the Mittelstand – often family owned and run, and savings banks and co-operative banks have played a vital part in sustaining them through the recession. Some three-quarters of German firms are clients of savings banks.
The savings banks go back a long way. During the nineteenth century local councils in Germany founded savings banks to encourage thrift. From 1929 they became independent institutions governed by the banking laws of the federal state in which they were located. They subsequently provided the services typical of all banks, but lending was restricted to individuals and organisations within the boundaries of the relevant local council.
Until 2005 all deposits were guaranteed by the federal state in which savings banks were based but in that year the guarantees were removed at the behest of the EU under pressure from international banks who argued that the guarantee was an unfair advantage they did not have. As we now know, when the going gets tough the private banks also expect the state to bale them out.
Savings banks have supervisory boards and executive boards like many large German companies. Two-thirds of the members of the supervisory boards are nominated by the local council and one-third by employees. This political power has not been abused, perhaps because the savings banks are under a clear legal obligation to function according to sound business principles.
They have a social and an economic mission – sometimes called the dual bottom line. They have an obligation to foster savings in each locality and must open an account for anyone who asks. Laws stipulate that profit-maximisation is not their primary role, but they must function on sound commercial lines. They operate under the same rules as other banks, including the prudential regulations, but are not permitted to invest in enterprises outside the savings-bank group. In addition, they cannot be bought and sold in secondary markets, but they can be taken over by or merged with other savings banks. As a result they are not vulnerable to the short-term herd behaviour of stock markets.
Their local roots make them more efficient in certain respects than commercial banks. In particular, they have the major advantage of being close to borrowers and able to asses risk more effectively. The lack of knowledge possessed by shareholder-value banks tends to lead to the imposition of additional costs on borrowers. Because the deposits of small savers must be safe, loans are linked to credit-guarantee insurers, thus permitting investment risks to be taken without endangering customer deposits. To further ensure stability and the security of deposits, they have regional associations that spread the risk and a national association to add further to their strength. In recent years they have proved to be more stable than some shareholder-value banks, not least because they had no involvement in sub-prime products.
How might the introduction of saving and enterprise banks in Britain work? We could establish one in every local authority area. They would be non-profit organisations run by professional managers who expect to work for an honest living, not to increase shareholder value at any cost. The managers would be supervised by trustees representing the customers. They would attract deposits by providing good market interest rates for savings and be obliged to offer full current-account banking to any law-abiding individual or organisation that asked. Investment in non-bank financial institutions such as pensions and insurance would not be permitted; nor would trading in securities. They would be required to invest in productive enterprises only within the local authority area and cover the risk by credit guarantee insurance. Their duties would include the encouragement of personal independence through saving for people on low incomes and to stimulate responsible private ownership by the owners of productive enterprises.