Rebuilding British banking must be based on local communities

Vince Cable and George Osborne are forming an effective tag team in putting pressure on banks to lend to small and medium-sized enterprises. Their argument is that the lack of credit is choking economic growth and small businesses across the country. Unfortunately for our political leaders, companies are deleveraging as an adjustment after the crisis – business has learnt that excessive debt is dangerous. The Coalition’s headline grabbing demand for higher lending masks deeper questions about the nature of British banking.

Retail banking lacks diversity. Due to bank mergers and demutualisations of credit unions, businesses and individuals are reliant on a smaller number of larger banks. Greater competition in retail banking is needed now more than ever more. Competition, by necessity, drives a customer relationship-led view. Some steps to boost competition have already been taken. However, the government has some levers which can be pulled today.

The Government is a major source of income for millions across the country. There is no reason why government cannot channel welfare and salary payments to second and third tier lenders. Banks are aggregators of capital. This solution will provide a temporary but large injection of funds into second and third tier banks. People can redirect this into larger first tier banks but even if only a small percentage keep their deposit account with second and third tier banks, these banks will now have enough of a deposit base to boost lending and provide credit to the SMEs.

The post office is the great underutilised device in British banking. The biggest problem for second and third tier lenders is distribution. Apart from internet banking, a large branch network is required to service a broad customer base. This takes time to build up. The Post Offices can be a great way for second and third tier banks to boost their distribution networks. There is nothing stopping the Post Office providing very “plain vanilla” retail banking services to people who are customers of second and third tier banks (think of the National Savings and Investment services offered but for people who bank with second and third tier lenders). The Post Office will be a distribution network for various banks, a “front office”, where basic banking services can be carried out.

Retail banks have a social contract with society. They are meant to be a safe place for people to deposit their money; a reliable and stable lender; and their operations are ingrained in local community economies. By reminding ourselves of the core purpose of retail banking and re-establishing this social contract, the Coalition can rebuild British banking on more stable foundations.

Sean Garman is on the Committee of Conservative City Future, the under-35 organisation for Conservative supporters in the City of London

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