Ways forward for co-operative and mutual banking in the UK

The real priority for the UK government has been distracted somewhat by the wider reports of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards....

The real priority for the UK government has been distracted somewhat by the wider reports of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards. This priority is to inject ‘game changing’ competition into a UK retail banking sector dominated by the big five shareholder owned banks, alongside one remaining large mutual, Nationwide.

Once the banking reforms in the pipeline are in place, a full investigation by the new Competition and Markets Authority seems appropriate. The reports essentially concluded that restructuring from a prudential perspective, to protect taxpayers and enhance financial stability, by implementing the ‘ring-fencing’ of core retail and commercial and investment banking from more risky investment banking should come first – before any further restructuring to improve the competitive provision of financial services and products; in part because the banking landscape will have been changed. The previous Competition Commission review was induced by the hard hitting Cruickshank Report in 2000 that uncovered anti-competitive practices in the payments systems and in SME banking. Only the latter was addressed, but problems with SME lending re-emerged in the post 2007-9 financial crisis ‘credit crunch’.

The Co-operative Bank’s competitive challenge is now on hold and other new banks (the Metro Bank and Virgin Money, for example) remain small and localised, while others are specialised in SME lenders (e.g. Aldermore). Foreign banks are not necessarily thriving, with the exception of the Swedish Handelsbanken UK branches; as in Sweden, they are devoted to ‘relationship banking’ like the German savings and co-operative banks have chosen to grow organically from a small UK base. Citibank’s Citi-Savings has reduced its UK ambitions substantially in the past couple of decades and NAB (the National Australia Bank) seems keen to sell Yorkshire Bank and Clydesdale Bank when the price is right. TSB is about to be floated on the London Stock Exchange as a spin-out from Lloyds Bank, and the RBS is similarly planning to spin-out William and Glyn’s, another medium sized bank, later in 2014. Both banks were required by the EC competition authorities, to sell branches following receipt of ‘state-aid’ in the form of taxpayer funded ‘bail-out’ funds from the UK government.

HSBC is believed considering floating its UK commercial banks, as is Santander, whose head office is in Spain. Santander pulled out of buying the branches RBS was required to sell, and the Co-operative Bank was forced to withdraw for its attempt to purchase the Lloyds ‘Project Verde’ branches. In both cases, significant opportunities for scaling up challenger banks were missed.

If Scottish devolution goes ahead, RBS could perhaps divest NatWest. Even so, the big banks, particularly Lloyds Bank, will continue to have a dominant share of the retail banking market. Some additional competition has emerged from internet-based ‘peer to peer’ lending, equity based ‘crowd funding’ and also ‘invoice discounting’ (or ‘factoring’)  for SMEs, but this remains ‘small beer’; and the big banks are already entering the market as funders and offering to help securitise outstanding loans. This sector has hitherto been largely unregulated and so banking supervisors, particularly the Financial Conduct Authority, will need to keep a watchful eye on it to ensure the investors supplying the funds are properly safeguarded. Problems are currently emerging in the ‘shadow’ trust banking sector in China where funders did not fully appreciate the lending risks. In that case form products bought through banks, but suitable ‘health warnings’ should clearly also be required for investment products sold over the internet.

The inescapable conclusion seems to be that the five big UK banks dominate household and SME banking and the payments system and that the core products and services they supply have the nature of utilities in a modern economy; with the money transmission system itself being infrastructural, much like the electricity grid. Access to finance for many remains restricted. There is ‘no universal service requirement’, unlike other utilities; although the government has encouraged banks to offer ‘basic’ bank accounts through Post Offices.

However, local, especially rural, sub-Post Offices have been closed, although its new head has called a halt to further closures, and its ‘main’, full service, branch network is in decline. The challenger banks and credit unions remain too small to make a significant impact. Government interventions to make current account switching easier may help inject competition, but consumer inertia as regards account switching has been evident in other network utilities such as gas, water, electricity and telephone services. Economists are also aware that oligopolistic markets, dominated by a few suppliers, can be very competitive (e.g. the car industry).  In UK banking, as in many other countries, we have an oligopoly with competitive fringe and the fringe suffers from the disadvantage that the big banks enjoy implicit taxpayer insurance that they are not fully paying for and tend to control the payments systems. The prudential and competition authorities need to address these issues through the appropriate regulation and taxation of banks and banking.

Credit unions should be encouraged, alongside CDFIs, and perhaps a number of local authority-sponsored municipal banks, to provide local banking services. Lack of access to finance and payments services is an increasing issue in many rural areas as the big banks have entered into yet another phase of cost cutting through branch closures, as witnessed by Barclay’s recent announcement that it is to instigate substantial cost cutting, possibly leading to further branch closures. Other big banks are expected to follow suit.

Barclays has already reduced its branch network by 8% since 2012, according to British Bankers Association figures, and the total number in the whole country has been reduced by 9% over the same period. New local mutual and municipal banks should be encouraged to expand and proliferate to fill the gaps left by branch closures and big banks should be required to keep the last branch in town open as a shared facility (as long as advocated by the Campaign for Community Banking Services – led by Derek French), at least until alternative local community banking service provision can be made available, given that the potential to use Post Office branch counters as a conduit is fast disappearing. The big banks could then perhaps use the local bank or credit union branches as agents. As in Germany and elsewhere, the future of mutual banking is local relationship banking. Without some sort of subsidy, and redress of the big banks taxpayer backed competitive advantage, it is hard to see how the change can be ‘encouraged’ decisively in the UK, however.

It is an old saying that mutuality grows where money flows. Relationships built on fair exchange, responding to markets of the day and the new internet based technologies, unencumbered by regulatory bias in favour of investor-owned models… this is the contemporary promise of co-operative and mutual banking. In sum, we need new mutuals to fill the gaps left by the old ones that failed by growing too big flying too close to the capitalist sun and became too hard to govern in the interests of their members. Our final blog post will consider whether the future for banking, and above all for mutual banking, is local.

• This article is part five of six. Read the first article (Mutuals have always been a longstanding force in banking)second article (The big bang; how demutualisation of building societies failed); third (Who decides? Governance and mutuality of the co-operative and mutual sectors) or fourth article (How do we grow credit unions and community finance?). This series has been commissioned by Co-operatives UK in the run-up to ‘Co-operation: How?‘ – the 2014 participative Congress that is exploring the scope for a co-operative economy, from banking to farming.

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