The failure of the banking system to provide small and medium sized firms with the credit they need has long been a feature of the UK scene. In 1931 the term Macmillan Gap was used to describe the separateness of finance and industry so that, in particular, smaller firms could not borrow as readily and favourably as they did in Germany and the USA at the time. Now 70 years on and the very same problems are with us.
Yesterday at as seminar at Civitas, London 'We're all in favour of industrial policy now!' the lack of funding was mentioned by all speakers: David Green (Civitas); Nicola Smith & Duncan Weldon (TUC); Prof David Bailey (Univ. of Coventry). The Chair, David Smith (Sunday Times) wrote about the Macmillan Gap in a recent article.
I contributed to the discussion on this by speaking of the analogy between the ways the National Health Service and the banking system function. They are both monopolies. Monopolies disrupt market flows and raise prices of goods and services. In a theoretical 'free market' prices and supply work out so that goods are available at fair prices with both suppliers and consumer getting a good deal. The regulation of the medical services monopoly (NHS) has been appropriately regulated so that everyone has a GP in their own town or district. If you are living in Hull you do not have to go to Leeds to see a GP to have an ailment sorted.
Something is still very wrong with the UK banking model. Greg Clark the new City Minister is tackling banking: Scandal-hit staff must go, banks warned (FT Wed Oct 17, 2012). He is sorting out the rot, but he appeals for reasonableness towards bank staff who had nothing to do with the mess. He says he wants to streamline the process of applying for a banking licence, making life easier for new entrants into banking, and 'it needs a particular push on the part of the authorities to reopen the markets to competition'. I wonder if he will address the inappropriateness of the way borrowing for small firms works now? Can you go into your local bank branch and set up a loan, with someone you know? Or is the decision made by someone who is based 50 miles away whom you might never have met, and who knows nothing of your firm apart from figures on a spreadsheet? If the NHS worked the way bank lending to small firms does we would be scandalised.
The German Sparkassen local community bank model shows how a sustainable local, and hence national, economy derives from geographically restricted banking. It is the tested way to regulate the banking monopoly if we want small firms to multiply jobs and growth. With a UK banking licence, once achieved it enables the holder to do banking anywhere. Ask yourself, if you were a bank manager would you spend time talking to 100 small businesses wanting a loan of £20,0000 each or to one business wanting a loan of £2,000,000? So a new bank with a full banking licence setting up in Town A will hunt out the big loans whether they are round the corner or 50, 500 or 1000 miles away. They will not bother with the many small businesses round the corner. Hence the Macmillan Gap perpetuates. See this short video interview with Prof Richard Werner for more.
If there was a simplified banking licence that excluded the features that contributed to the financial crisis, such as speculative borrowing, new entrants might come forward and bring the competition that Greg Clark wants, to sort out the banking monopoly.
Government could guarantee lending given by local authorities to provide start-up equity capital for local community, not-for-profit banks. This would give a signal that localism powers could be used for something positive like jobs and growth. There must be one of the several recent banking fund initiatives, or a QE feature, that could be used for this from tomorrow morning by Greg Clark, surely?
Local independent banks have worked well for many decades in Germany, USA, Switzerland and elsewhere. The Spanish savings bank crisis resulted from the failure to prevent several small local banks setting up shop in one town, thus monopolies for banks need particularly crafted regulations, like health services do. But there are enough good models to follow if we dare to look beyond the white cliffs of Dover.
Posted by Charles Bazlinton
Yesterday at as seminar at Civitas, London 'We're all in favour of industrial policy now!' the lack of funding was mentioned by all speakers: David Green (Civitas); Nicola Smith & Duncan Weldon (TUC); Prof David Bailey (Univ. of Coventry). The Chair, David Smith (Sunday Times) wrote about the Macmillan Gap in a recent article.
I contributed to the discussion on this by speaking of the analogy between the ways the National Health Service and the banking system function. They are both monopolies. Monopolies disrupt market flows and raise prices of goods and services. In a theoretical 'free market' prices and supply work out so that goods are available at fair prices with both suppliers and consumer getting a good deal. The regulation of the medical services monopoly (NHS) has been appropriately regulated so that everyone has a GP in their own town or district. If you are living in Hull you do not have to go to Leeds to see a GP to have an ailment sorted.
Something is still very wrong with the UK banking model. Greg Clark the new City Minister is tackling banking: Scandal-hit staff must go, banks warned (FT Wed Oct 17, 2012). He is sorting out the rot, but he appeals for reasonableness towards bank staff who had nothing to do with the mess. He says he wants to streamline the process of applying for a banking licence, making life easier for new entrants into banking, and 'it needs a particular push on the part of the authorities to reopen the markets to competition'. I wonder if he will address the inappropriateness of the way borrowing for small firms works now? Can you go into your local bank branch and set up a loan, with someone you know? Or is the decision made by someone who is based 50 miles away whom you might never have met, and who knows nothing of your firm apart from figures on a spreadsheet? If the NHS worked the way bank lending to small firms does we would be scandalised.
The German Sparkassen local community bank model shows how a sustainable local, and hence national, economy derives from geographically restricted banking. It is the tested way to regulate the banking monopoly if we want small firms to multiply jobs and growth. With a UK banking licence, once achieved it enables the holder to do banking anywhere. Ask yourself, if you were a bank manager would you spend time talking to 100 small businesses wanting a loan of £20,0000 each or to one business wanting a loan of £2,000,000? So a new bank with a full banking licence setting up in Town A will hunt out the big loans whether they are round the corner or 50, 500 or 1000 miles away. They will not bother with the many small businesses round the corner. Hence the Macmillan Gap perpetuates. See this short video interview with Prof Richard Werner for more.
If there was a simplified banking licence that excluded the features that contributed to the financial crisis, such as speculative borrowing, new entrants might come forward and bring the competition that Greg Clark wants, to sort out the banking monopoly.
Government could guarantee lending given by local authorities to provide start-up equity capital for local community, not-for-profit banks. This would give a signal that localism powers could be used for something positive like jobs and growth. There must be one of the several recent banking fund initiatives, or a QE feature, that could be used for this from tomorrow morning by Greg Clark, surely?
Local independent banks have worked well for many decades in Germany, USA, Switzerland and elsewhere. The Spanish savings bank crisis resulted from the failure to prevent several small local banks setting up shop in one town, thus monopolies for banks need particularly crafted regulations, like health services do. But there are enough good models to follow if we dare to look beyond the white cliffs of Dover.
Posted by Charles Bazlinton
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