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Local banks gather pace

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East Sussex County Council is holding talks with other councils about setting up a £1bn bank amid signs the local government banking movement is gathering strength.

While the project has similar aims to Essex County Council ‘s bank (LGC - 30/04/09) in seeking to support credit-starved small and medium-sized companies, East Sussex hopes, in a pioneering move, to provide its £10m-£15m share of the start-up capital from its pension fund, rather than its cash balances.

The council is to hold talks with private sector banks in the coming months with the aim of finding a partner to provide infrastructure and know-how.

Kent County Council has already expressed interest in the venture and East Sussex believes that other counties and London boroughs will join, as well as private sector companies.

East Sussex leader Peter Jones (Con) has been taking advice from British Bankers’ Association chief executive Angela Knight, a close friend.

Cllr Jones said: “A proportion of our pension fund, around 5%- 7%, is invested in venture capital, usually through a venture capital fund. Some of this could be invested in creating a new bank.

“We would not look to set the bank up on our own but in co-operation with an existing bank, in the way that Tesco and Sainsbury’s have done. It would run all the banking operations and we would be able to use its banking licence.”

Cllr Jones added that he hoped plans would be finalised by the end of the year.

‘Critical mass’ in the summer

New Local Government Network director Chris Leslie said now was the time for further discussions with government. “The Treasury should be supporting and investing in these local investment vehicles. By the summer we should have reached a good critical mass of council banking schemes that are coming to fruition,” he said.

The news comes amid calls from politicians and economists to re-establish a regional banking system — one in which councils have historically played a leading role.

Addressing a regional Labour conference last week, former Labour home secretary David Blunkett called for “the creation of city or regional banks… lending back into the local community from which the resources were raised”.

Meanwhile, Work Foundation chief executive Will Hutton called on Manchester, Leeds and other large cities to look at building “serious financial institutions”.

Birmingham City Council has already proposed setting up such a bank (LGC - 20/11/08) .

Mr Hutton told LGC: “This country needs local financial institutions which understand the people who they are lending to and can assess credit worthiness because they are on the ground and know the people.”

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