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Britain Needs German-Style Banking to Reignite Growth, Says Report

Copy Germany and create local banks, says report

Coalition efforts to reform Britain’s over-centralised banks do not go nearly far enough, suggests a new Civitas report. Britain remains over- too reliant on big banks despite incoming Bank of England Governor Mark Carney’s recent warning that “too big to fail” banks are still a threat.

Emergency relief is the most effective form of aid, the book argues, and is much less prone to the corruption and waste that bedevils so much of Britain’s lavish aid spending.  It also enjoys the highest level of public support.

Britain should break up the big banks and create German-style local banks to serve the real economy rather than engage in financial speculation.

Author Christopher Simpson’s detailed scrutiny of the differences in British and German banking finds that while local German Savings Banks have increased lending in every year since the 2008 financial crisis, Britain’s pressing investment needs have not been met by its over-centralised commercial banks.

Britain’s strivers held back by big banks

Britain has one of the highest business start-up rates in the world but entrepreneurial dynamism and economic prosperity are held back by a shortage of finance. When business lending is available, it is often with high interest rates and requires substantial collateral. Simpson attributes the British banking malaise to the heavy centralisation of the sector. Lacking local managers who could obtain detailed knowledge of an area and its loan applicants, major British banks instead rely on ‘formulaic processes and computer analyses in some remote central office’.(p. vii)

German success versus British malaise

Much like our own banks, the big German commercial banks cut lending to businesses after the crisis in 2008. However, Germany has a parallel system of community Savings Banks (Sparkassen) that actually increased their lending during this turbulent period, providing vital support for the wider economy in difficult times.

While Britain’s banks regularly turn away successful businesses, Simpson’s forensic case study reveals how a local German Savings Bank provided crucial support to a cutting edge exporter with 800 employees during the worldwide recession. This concrete example provides a strong insight into the causes of German economic success. Whereas local entrepreneurs in Britain are ignored by the large commercial banks, the Sparkassen give German entrepreneurs and communities the independent means with which to improve their lot and contribute to the wider economy.

The roots of German success

Simpson also explains how the Sparkassen operate, describing their history, structure and organisation. Savings Banks are only allowed to lend within a geographically defined local area and as a result develop close relationships with their customers. They are publicly-owned but independent organisations with the ‘common good’ objective of supporting sustainable economic development rather than maximising profit. Moreover, their geographical spread extends to all of Germany, ensuring that all communities have access to finance. They are a key factor behind the success of Germany’s formidable ‘Mittelstand’ sector of small and medium-sized enterprises. In 2010 they funded over half of new business start-ups in the country.

How to create a British Sparkassen

Simpson’s case study shows how Britain can recreate a similar system. The Coalition should transform the branch network of state-owned RBS and Lloyds TSB into a network of local community banks covering the whole country. Each bank branch should:

  1. be independent of political control
  2. be controlled by stakeholders from the local community
  3. only lend to local businesses in its local area
  4. be banned from engaging in financial speculation
  5. operate on commercial principles with the aim of maximising sustainable lending not profits


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