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Andrew Burns: We need regional banks to drive local growth

Andrew Burns
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The Conservatives’ plan to create ‘Future Britain Funds’, which will hold in trust the investments of the British people, backing British infrastructure and the British economy.

They anticipate early funds being created out of revenues from shale gas extraction, dormant assets and receipts of sale of some public assets, and will encourage pension funds with an interest in joining Future Britain funds to do so.

Labour pledged to set up a National Investment Bank and regional development banks to finance growth and good jobs in all parts of the UK through major capital projects.

I am encouraged that this appears to be a non-partisan issue and a range of think tanks from across the political spectrum, including the Institute for Public Policy Research and Localis, have called for similar mechanisms to overcome barriers to more inclusive economic growth, especially outside of London and the South East.

In the UK regions there is lower public investment to grow the economy in areas like science, technology and infrastructure; small and medium sized enterprises find it more difficult to access credit and have less access to private equity and venture capital and a greater dependence on public sector investment.

Where these manifesto ideas from both could be more interesting and have greater potential is in developing and funding regional banking.

Dormant assets, public assets and shale gas (if that ever happens) will all have local roots and impacts so these proceeds should be reinvested locally and regionally to support the emerging industrial strategy and more inclusive growth.

During 2016-17 I represented the Chartered Institute for Public Finance & Accountancy on the RSA Inclusive Growth Commission.

In its March 2017 report, Making our Economy Work for Everyone, the commission identified international evidence that suggests that regional banks are an important institutional component of inclusive growth.

Local banks make up significant proportions of banking assets in most European and many Asian countries, as well as in Canada and the USA, but the sector is comparatively very small and constrained in the UK.

Regional banks serve a specific geographic area, focusing on retail banking. The best models possess three additional defining characteristics:

  • Mission led – they have a dual social and financial mission written into the constitution of the bank
  • Commercially rigorous – regional banks lend on a commercial basis. However, with the benefit of additional ‘soft information’ they can successfully lend to a wider range of businesses that might otherwise lose out on the basis on centralised credit scoring adopted by the major banks
  • Network collaboration – they collaborate to share costs where possible to achieve economies of scale while retaining their regional autonomy to protect their mission.

This form of bank complements the presence of large national and global shareholder banks by pursuing a different business model and brings social and economic benefits, regionally and nationally, in four main ways:

  • The resilience of the overall financial system is improved by the diversity provided by regional banks. After the financial crisis large banks reduced their credit to repair their balance sheets, but UK regions, unlike those in other European countries, were not able to experience the cushioning effect provided by regional banks. The building society sector does not play this role as it is restricted to lending for residential mortgages.
  • The quality of credit allocation improves as a result of superior access to the local insight that is required to make more marginal or favourable lending decisions, based on good relationship managers based close to the customer. SMEs and social enterprises are affected the most because they are more difficult to collect hard information on at a distance, and sometimes have poorer collateral, requiring credit officers to place greater reliance on judgements about future cash-flows.
  • Local stakeholder banks usually operate under a commitment to financial inclusion. Over a million UK adults still lack a bank account and around 2.5 million use unregulated high-cost credit.
  • The presence of a head office with highly qualified professional staff across all business functions from IT to marketing would add an important route for local career progression as an alternative to migrating to London.

To bring any industrial strategy to life, especially post-Brexit, we will need investment in the economy in every UK region.

This means making capital available to SMEs to catalyse grassroots business renewal. Some SMEs struggle to fund growth or create product lines. Others may need support to stay steady when cash-flow is a problem. People will want to launch micro-businesses.

What inclusive growth needs is a network of regional banks to fund regional investment (e.g. highways maintenance and improvement, rural 4G/5G broadband) not just national funds for high-profile infrastructure projects.

Andrew Burns, director of finance and resources, Staffordshire CC

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