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Regional Banking For Regional Growth

  • RBS should be fashioned into a new network of regional banks to support small business
  • Ministers must support development of new institutions based on German Sparkassen, says Civitas
  • Regional model would support growth and reduce banking system’s reliance on state welfare

The government should urgently consider transforming Royal Bank of Scotland into a German-style network of regional banks, the independent Westminster think tank Civitas says today.

The Sparkassen, which only lend within their local areas and have a duty to promote growth, are a major asset to the German economy. A similar system could dramatically improve the fortunes of small and medium-sized businesses in Britain.

In a new report published today, Civitas research fellow Kaveh Pourvand argues that a practical way of importing the idea to the UK would be to adapt majority state-owned RBS into a British Sparkassen.

“It already has a branch network, a customer base and well established banking infrastructure in terms of IT, administration and so forth. RBS could be turned into a national system of regional banks while the company’s infrastructure could be kept in place to provide individual banks with services they could not provide for themselves,” Mr Pourvand writes.

“Like the Sparkassen, the banks would only lend in a specific area and would have a duty to promote growth.”

RBS presents a perfect opportunity to introduce Sparkassen-style banking to the UK, but such a network could also be encouraged by removing barriers to entry – such as the enormous costs of setting up a new bank – and providing support for new entrants to the market with complex regulatory, IT and legal requirements.

“These are the options for the banking sector the government should be considering, if it is serious about growth,” Mr Pourvand adds in ‘Small is beautiful: lessons from German banking’.

Germany’s banking system has played a significant role in that country’s more successful recovery from the recession than the UK. The Sparkassen, based on relationship banking and using local savings deposits to support local enterprise, make it easier for SMEs to get loans and with less threat that they will be withdrawn at short notice.

Holding about a third of bank assets and about 40% of all customer deposits, they provide about 40% of all business loans, and their market share of business start-up loans is 56%. During the German recession they increased loans to business while the large commercial banks cut them.

The Labour Party has already promised to promote regional banking, but the government is not similarly committed.

Mr Pourvand argues that the government’s reluctance to support institution-building in banking is simply propping up an inefficient sector with taxpayers’ cash.

“Whatever current policies amount to, it is not a promotion of open and competitive banking. Creating a regional banking system like the German Sparkassen would help to pluralise Britain’s banking system, reduce its reliance on state welfare and make it serve the real economy.

“Their strong local knowledge and commitment to economic development over profit maximisation allow the Sparkassen properly to assess business risk and provide patient, long-term capital to German SMEs.

“In stark contrast, overly centralised British banks have little local knowledge and prioritise financial returns above wider economic considerations. They are more oriented towards low-risk, high-return property and financial investments to the detriment of the wider economy.”

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