I received this graphic in my email today. It’s one of the topics of the Transforming Finance conference which is going on today, looking at why Britain might be better off with more local and regional banks. We’re quite unusual in this. High street banking in Britain is dominated by a handful of big names – Lloyds, Natwest, Barclays et al. Most other developed countries have a richer diversity of banks. Just 3% of Britain’s banking assets are in local banks, compared to 67% in Germany.
We didn’t used to be that way. There used to be a rich variety of banks, some of them quite large and well established, but still focused on particular cities or regions. What happened in Britain was basically an arms race of mergers. Banks began to form partnerships, merge and consolidate. As big players emerged, other banks quickly began merging too in order to stay competitive.
It led to a series of unwieldy names. At one point Barclays was known in the City as ‘the long firm’, because its official name was Barclay, Bevan, Tritton, Ransom, Bouverie and Co. That list was only a fraction of all the various banks incorporated into Barclays at the time, the full list running to 71 different partners.
This could have been stopped, but the wisdom of the time was that bigger banks were more stable and better equipped to handle banking crises – of which there were several. Big ones in 1866 and 1878 accelerated the trend, and by the beginning of the First World War, six sevenths of Britain’s banking names had vanished.
Does it matter? Yes, in that monoculture is never a good thing. It leaves you vulnerable, and we all know the phrase ‘too big to fail’. Local banks are also able to be more targeted to their regions, providing mortgages or business loans that suit the local economy. A mortgage on a house in London could look quite different to one in the North East, if we had that option. Local banks are also better at lending to small and medium sized businesses. Nef’s report on Stakeholder Banks makes the case for them in more detail.
There are measures in place to try and improve Britain’s banking diversity. There are new rules coming in to make it easier to switch banks. There are new banks gaining ground, like Metro Bank in London. Swedish bank Handelsbanken runs every branch locally, and builds relationships with local business that British banks can’t match – as Mervyn King admitted recently. We may yet be able to break down the monopoly of the big banks.
The Earthbound Report 
Small banks are good, like Northern Rock and Bradford and Bingley? No, perhaps building societies like the Dunfermline? Perhaps not. I wonder why the NEF graphic doesn’t show Spain which had a wonderful number of local banks.
Of course we have right now a great opportunity to get new small banks into the system with the divestiture of hundreds of branches from Lloyds and RBS. The trouble is that the tough new regulations intended to prevent future crashes means that potential smaller operators who want to buy these branches can’t meet the new rules. We need to foster competition and be careful that regulation fighting the last war doesn’t reinforce the existing oligopoly.
Another thing before we congratulate Germany on its wonderful Landesbank. These should have gone bust with Ireland’s banks since they held lots of their paper. But the German government strong armed the Irish into nationalising those debts so the German banks would get their money back. Ireland crippled on the alter of solid German regional banking.
Diversity is good. I’m not arguing that small banks are magic, or that they will protect our economy. What I do know is that concentrating banking in four massive corporations is a silly thing to do. The government recognises that, although whether they will succeed in lowering the barriers to entry remains to be seen.
At the moment we’re in a bit of a bind, because we don’t have enough medium sized banks to pick up those spare branches. We have the huge banks, and some very small ones. Even the Co-op hasn’t been able to step up. We’re starting from a bad place.
I’m not congratulating Germany’s banks or Germany’s abuse of power, but they’re getting a few things right. One of them is a vibrant culture of SMEs (diversity again) and they’ve got a financial system that encourages that. We can learn from that.
An interesting article. What do you think about the idea of ethical banks like Triodos? http://www.triodos.co.uk/en/personal/ I agree that a diversity of banking would be a good idea, but I also think the way banks operate should be rethought.. Although perhaps that’s simply too ambitious..
It was a really good conference. You should have been there!
One of the things that came up near the beginning of the conference was not to idealise Germany or any particular one country or solution too heavily. Generally, all banking systems have their quirks and problems, and are never going to be completely fair (unfortunately). But having multiple smaller and more accountable banks does make the sector more stable.
I recommend having a look at the Transforming Finance Charter, because that gives an overview of ALL the ideas that are deemed a part of the reform required to stabilise our banking system: http://transformingfinance.org.uk/charter/.
I would have liked to have been there… glad you made it!
And absolutely, we can’t idealise other banking models. I only mentioned Germany to illustrate the difference. We need to develop a banking system that works best for us. Will definitely check out the charter.