Colleagues in the office and those who know me already are aware that I am extremely interested in regional banks. It is hardly surprising that the topic is in vogue given we suffered the financial crash in 2007 and that six years on the economy continues to stutter. There are also political shifts such as the rhetoric to ‘rebalance the economy’ and a greater emphasis on local economic growth.
The discussion has been ratcheted up today with Ed Miliband delivering a speech on this topic at the British Chambers of Commerce conference. The model in Germany is often cited but how many people actually know what it looks like? Well, for those who want a bit more information, read on!
The German financial system operates within a federal political system and is based upon three tiers of banking: 1. Public banks; 2. Co-operative banks and; 3. Private banks.
Public banks are owned, run and managed by federal government, states, districts or cities and have a specific investment remit, for example development and infrastructure, with a long-term perspective. Importantly, finance is raised by issuing bonds that are guaranteed by the federal state. There are two sub-sectors of public banks: Sparkassen (savings banks) and Landesbanken (regional banks).
- Sparkassen are locally owned and run, often by cities or a group of cities (not for profit) and concentrate on universal banking (for example, loans to individuals and SMEs).
- Landesbanken are owned by savings banks via the federal system. The Landesbanken are effectively the central bank for the region’s Sparkassen (by providing liquidity) and also provide wholesale banking (i.e. to large organisations and/or cross region finance).
Co-operative banks include both credit unions and co-operatives and offer similar but differentiated products.
- Credit unions provide loans and finance to the individual and small businesses based upon a common bond under which the credit union operates. For example, the credit union could be location specific or profession specific.
- Co-operatives provide finance to individuals and SMEs but offer more democratic accountability as members can decide how the bank is run.
Private banks operate as private banks do here, in the UK. They have branches across the country (and, indeed, the world), and provide all the same services.
The UK does not have public banks but rather has a private sector led system. The difficulty in changing the system in the UK is that we don’t have a federal political system and so financial responsibilities are maintained at the national level. Moreover, public banks would also require institution building which takes time and money.
However, there are already many funding streams from central government to target specific industries – namely manufacturing or green technology – as well as specific financing ideas such as the Cambridge and Counties Bank (a partnership between the university and the county) which could benefit from such a targeted system. There may also be a role for quantitative easing to be better channelled into regions via a new finance structure.
One thing is for certain; if the idea of regional banks is to catch on in the UK the core principles need to remain and the institutions need to be tailor made to our political, economic and administrative system. Public banks in Germany have local knowledge of their economy which informs their long-run investment mentality and ensures local economic growth is championed above short-run profit.