Bookmark and ShareJosh Ryan-Collins is a researcher in the Connected Economies team at nef.

Oh to be a fly on the wall when Gordon Brown and Alistair Darling haul the big banks in to Downing Street, demanding to know why interest rate cuts are not being passed on to small businesses and homeowners.   The press, not least the tabloids, have jumped on the ‘blame the banks’ bandwagon with relish.

But as we have seen since September, there is little national governments can do to encourage lending when the Banks are locked in to a global credit crunch with plenty more steam in its engine.  The reality is that these behemoth banks, through successive rounds of deregulation and mergers, are no longer structured in a way that properly serves the needs of local communities and businesses.  They weren’t doing much of a job even before the crunch, making their money not through careful loans to local businesses they knew and understood but  through investment in the speculative markets of high finance and consumer loans.

But as recession looms, community banking is making a come back.   In the last two weeks, Essex County Council and the City of Birmingham local authorities’ have announced plans for local banks.  Their aim will be to  lend public money at reasonable rates to cash strapped small businesses and homeowners in their areas.  What a wonderful idea.

Essex has been inspired by the successful lending models of small regional banks in the US, including its namesake across the Atlantic based in Virginia.  Importantly, legislation – the Community Reinvestment Act – in the US requires banks to disclose where and to whom they lend in their local community. Compliance with this act is part of the bank licensing requirements, and it also exerts public pressure if they are failing to invest in local communities.  As nef has argued in a recent report, similar legislation should be created for the UK.

Meanwhile, Birmingham City council, the UK’s largest local authority, is planning to create a bank to lend up to £200m to small businesses, as reported in the Financial Times.  The Bank of Birmingham (AKA BoB), which had its first incarnation in 1916 when Neville Chamberlain was the Mayor of Birmingham, will apparently also take retail deposits.  

nef has been making the case for community banking for some years and is currently involved in developing Community Banking structures with Local Authorities and other partners in mid-Wales, Merseyside, London, the Midlands and Somerset. 

A secure and stable economy requires a diversity of local and regional financial institutions, none of which will be too big to fail but all of which will be small enough to care about their local economies.  Essex and Birmingham have shown the way, now lets hope others, including perhaps the post offices, will follow.