Jeremy Corbyn remains deeply unlikely to be the next UK prime minister. But the Labour Party’s showing in UK polls shot up last week, to a mere five or six points behind the ruling Conservatives. That matters, because the Labour manifesto promises a radical restructure of the UK financial system.
The model, it seems, is Germany — a system where banks are chronically unprofitable and prone to ill-advised investment splurges, but where, according to its advocates, small and medium-sized enterprises are supported, customers are taken care of and communities are strengthened. A banking system where the bank serves the economy, rather than vice versa.
To that end, there will be a National Investment Bank, as well as several regional development banks, “dedicated to supporting inclusive growth in their communities”, as well as potentially breaking RBS up into “new local public banks that are better matched to their customers’ needs”.
The Post Office, rather than fronting for Bank of Ireland, will establish a Post Bank, “providing a full range of banking services in every community”.
Labour will also ensure that branch networks continue to be a firm feature of UK banking, by changing the law “so that banks can’t close a branch where there is a clear local need, putting their customers first”.
The fascination with Germany’s banking system has a long pedigree on the British left — presumably because the last seven years have not been kind to the “local community and co-operative banks” in the likes of Spain and Italy, and so better to direct attention to an economy which weathered the crisis well.
But the jury remains out on whether Germany thrived because of its banking system or in spite of it.
The UK, with a highly concentrated, centralised but basically profitable banking system, saw the spectacular collapse of RBS, alongside gentler but substantial failures from Northern Rock and HBOS, and a slump into distress from the Co-op Bank.
UK politicians of all stripes should feel rightly aggrieved, and ready to encourage alternative structures — as governments since the crisis have tirelessly emphasised, with special encouragement for fintech challenger banks and the retroactive milking of bank shareholders for billions in PPI payouts.
Germany, meanwhile, saw bailouts for IKB Deutsche Industriebank, Commerzbank, HSH Nordbank, BayernLB and LBBW, while Hypo Real Estate, WestLB and Depfa are in wind-down. Weaknesses at all of these institutions stemmed largely from assets elsewhere, be it Greek government bonds, US subprime RMBS, Irish real estate, or wholesome, real economy shipping lending. German banks, particularly those with a public mission or ownership, seem to have been on the wrong side of more than a few trades.
Purists would argue this comes not from public ownership, but from a dilution of public mission. Had the Landesbanken concentrated only on lending to their regions’ industries and tirelessly supporting Deutschland AG, rather than being freed to chase yield across the globe, perhaps none of the bailouts would have come to pass.
Perhaps. But public ownership and local concentration is frequently a recipe for the grubbiest kind of banking, a crooked nexus of local politics, real estate development and banking. Local democratic control of banks all too often ends up in soft loans to favoured projects, given fast-track planning permission by the same politicians that control the banks.
The UK might hope it has a cleaner local politics than India or Italy, both countries familiar with the benefits of locally directed banking. But there are plenty of examples closer to home — the secondary banking crisis of the 1970s, or the collapse of Anglo-Irish just across the Irish Sea. The reality of directing lending towards politically favoured industries or business models is less likely to nurture a robust UK Mittelstand than it is to inflate regional commercial property speculation.
Breaking up RBS, too, does little to resolve its problems. As recent events in Italy have demonstrated, 20 small weak banks still seem to need about as much bailing out as one large one, depending on who, exactly, has lent them money. RBS’s problems have been as much a feature of its pre-crisis acquisition binge, poorly integrated systems and a panoply of legacy conduct issues as of its size. Breaking it up does nothing to solve those issues and nothing to recoup taxpayer funds.
For all those criticisms, the UK does lack a National Investment Bank — a feature of most large European economies, and a valuable one, especially as European Investment Bank funding seems set to end.
As GlobalCapital argued last week, there’s little value in funnelling cheaper cash to corporates which can already borrow readily in the market. But a National Investment Bank could be crucial in seeding major infrastructure projects, navigating construction risk and taking a multi-decade view often beyond the capability of its political masters.