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A new public banking ecosystem

Acting CWU regional secretary in Scotland CRAIG ANDERSON explains the need for change to our privately dominated banking system

BRITAIN has one of the largest, least diverse, most complex and interconnected financial systems of the advanced economies.

In contrast to many other countries, the banking sector in Britain is dominated by a handful of large, shareholder-owned universal banks, whose main aim is to maximise shareholder return.

Britain is also unusual in that it lacks a significant local or regional banking presence — the market is overwhelmingly dominated by national and often internationally orientated banks.

These features contribute towards a number of social and economic problems.

In the regions and countries that are the most innovative, public sources of finance play a key role supplying the strategic finance that the private sector is unwilling to provide.

Early stage public investment helps to create and shape new markets, creating a new landscape which the private sector later develops.

From advances such as the internet and microchips to biotechnology and nanotechnology, many major technological breakthroughs — in both basic research and downstream commercialisation — were only made possible by direct public investment.

In each of these areas the private sector only entered much later, piggybacking on the technological advances made possible by public funds.

The lack of diversity in the British banking sector means that it is uniquely vulnerable to financial crises.

This is because similar institutions with similar business models are likely to suffer from the same problems at the same time, increasing the chance of a systemic crisis.

When a shock such as the 2008 financial crisis hits, if banks have different operating models, they are affected in different ways, reducing the risk of the contagion spreading throughout the entire financial system.

Domination of our banking sector by a small number of big banks with similar business models, along with their size, complexity and interconnectedness, means we have one of the least resilient financial systems worldwide.

A resilient banking system requires a diversity of providers for consumers to choose from, rather than simply a larger number of major players following the same business model.

The recent CWU-commissioned report supports Labour’s 2017 manifesto plan for a national investment bank which would be given a broad mandate to support the government’s industrial strategy.

This approach enables the creation of a powerful synergy between finance, regulation and other policies, which can be simultaneously co-ordinated to drive structural transformation.

This transformation must filter through to the whole country which has suffered from economic neglect under the current government’s model.

A network of regional development banks that would be dedicated to supporting inclusive growth in their communities should be formed and supported by the national investment bank.

Crucial lending and investment locally in small to medium-sized businesses will stimulate growth, jobs and the economy.

This, coupled with closer working with government to support a programme of local regeneration in areas which have historically been neglected, could be financing new infrastructure, housing and nurturing new industries.

The final piece in this banking jigsaw sees the need to address the decline in the access of public branch banking. The large banks would have us believe we as individuals have changed the way we all want to bank. Really?

The closing of branches and the promotion of cheaper online banking has been a purely commercial decision to maximise profits and reduce costs.

Some 1.5 million adults remain unbanked, while 3.8 million households do not have internet at home and 12 million people live in rural or remote areas where poor internet access makes it difficult to bank online.

Meanwhile, a growing number of communities are being left without access to banking services.

The CWU believes we must maintain basic branch banking as a public utility.

Many customers rely on their local branch for banking services — as commercial banks are rapidly withdrawing from the high street, these customers are at risk of being excluded from the financial system altogether.

This is why the formation of a “post bank network” is required. Given that the Post Office’s branch network is needed for postal services, the marginal cost associated with branches for a “post bank” is much smaller than for commercial banks.

Moreover, many businesses visit the Post Office for cash or mailing services, so a “post bank” would be well placed to attract new customers.

In Japan, France, New Zealand and several other examples from around the world we see that postal banks can be a successful and innovative player in the banking sector, capitalising on core assets such as a strong brand and extensive branch network.

The Post Office is generally held in very high regard by the public, with a recent survey showing that it is the second most trusted brand by the British people.

The global financial crisis, together with the ongoing excesses and scandals, has rightly led to heightened mistrust towards banks. In the CWU’s opinion therefore, “post banks” would have high level of trust and natural customer base.

The extensive research in our “A New Public Banking Ecosystem” report clearly demonstrates the need for change and that with open minds and the willingness to move away from an inherited, deeply flawed structure at present, Britain can establish a banking model for the many in this country — not a few elsewhere.

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