Tuesday, June 12, 2012

Cambridge & Counties new bank - as beneficial as it might be?

A new local bank is launched in the UK. Press release here.  Cambridge & Counties Bank, jointly owned by Cambridge Local Government Pension Fund and Trinity Hall the University of Cambridge college. We have a new creator of credit which adds to the UK money supply. But how does this particular venture help the UK economy in terms of Prof Richard Werner's video interviews? To summarise the new bank's situation:

1. Small and Medium Sized  enterprises (SMEs) are to be the main borrowers and  this should help the local economy and generate new local employment, improving the quality of life in local communities. There is an unfulfilled need with many SMEs not being able to access funding from existing banks.
2. The Pension Fund backers will gain secured lending (against commercial property), so it is a for-profit bank that needs good returns. Working capital loans for SMEs will be secured against owner/occupier property. These show obvious concern that the bank should be viable in the context of providing profit for its backers.
3. There is to be an emphasis on personal relationships between customer and bank. This should help customers and the bank an important feature lacking as highlighted in the recent Banking Appeals Task Force  Annual Report on the Better Business Finance website
4. Without a recent history in the banking industry the bank starts with a clean slate and should do well without the drag of past financial calamities.

Richard Werner explains in the video interview: Who Allocates the Money Supply? that banks decide according to their own private decisions and this bank is no different. It is emphasising SMEs which is admirable as that is where the future employment growth will come from. But it seems you will have to have property to back your loan or overdraft. If you want to start a business or run project but do not have property that you can offer as collateral, then you may not be helped and the economy will not grow in that direction.
Perhaps the bank with its strong 'personalised relationship approach' will be able to assess a good lending prospect based strongly on the abilities of person in from of them rather than the value of their home? Richard Werner in his video on local banking shows how local banks outside the UK are very strongly relational and both parties (lender and borrower) may have known each other for years. It is 'a relationship of trust between the bank and the customer'.
Investment by the pension fund in commercial property through the bank will encourage that sector which has been bombed out as this asset price bubble burst. Maybe a good time to be getting back into the future bubble for a pension fund? But if credit creation through the new bank goes towards property it does not of itself add to productive investment that would add to useful GDP, but merely raises property prices. See video: Who Creates the Money Supply? 

This seems to be a good time to start a new local bank which has external shareholders needing returns, and aimed at loans for SMEs.  In these circumstances an emphasis on property-backed loans is probably inevitable. However banks do not have to be run like this. The credit creation monopoly granted with a banking licence can either: feed profits to the high bank salaries and returns to its owners or: if the bank was not-for profit, help local businesses more and also feed profits to the local community. Loan assessment and returns for a community bank are different.  The Bank of North Dakota in the USA and Sparkassen, Germany are just two such community banks and the pattern is replicated across the world. The UK is backward and virtually alone in developed nations in not having a not-for-profit banking sector to serve ordinary people and their businesses, and ordinary communities rather than ordinary shareholders. And the UK economy suffers due to this emphasis on protecting private profits from the banking monopoly.
posted by Charles Bazlinton  

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