Investment bank needs local Welsh roots

Geraint Talfan Davies urges Wales to push beyond the present consensus in favour of an investment bank






Germany's public savings bank, Sparkasse, provided 43% of loans to SMEs in 2010.

A Labour Business Minister in the Welsh Government appoints a former Conservative candidate and academic to head a task force looking into business finance in Wales. Commendably ecumenical. Meanwhile, a Plaid Cymru Economic Commission is looking seriously at the prospects for creating a bank for Wales, an idea that has been floated in this column more than once (Here). The Welsh Conservatives are, too, promoting more local banking institutions. At the London end both Ed Miliband and Vince Cable are keen on a new investment bank, although George Osborne has been slow to come up with the necessary.

So, on the surface, one might think it possible to get a cross-party consensus on what needs to be done. Many will say, don’t hold our breath. But could it be different this time?

Consider this. A Bank of Wales has never been a nationalist enterprise. It was first conceived by a Labour-supporting entrepreneur, Sir Julian Hodge, with the overt backing of a Labour Prime Minister-to-be, Jim Callaghan. The deeds to the title of the now defunct bank are currently held in a drawer in Lloyds – effectively a nationalised bank – having been the victim of industrial consolidation: bought (and closed) by the Bank of Scotland, that then become HBOS before disappearing into Lloyds.

Edwina Hart, the Business Minister, Professor Dylan Jones-Evans, the task force chair and Adam Price, who heads Plaid’s Economic Commission, will have no shortage of reading matter on the issue. There have been countless reports in past decades on the lending gaps for SMEs.

One was authored by the former managing director of the private equity group 3i, Welshman Chris Rowlands. He studied the issue for Gordon Brown who, in 2009, promised to establish a Growth Capital Fund. The CBI has called for the re-creation of the Industrial and Commercial Finance Corporation that was set up after the Second World War. At the UK level last year a Small Business Task Force for the Labour Party, led by Nigel Doughty, chair of one of Europe’s largest venture capital groups, called for much the same thing, this time based on the model of the American Small Business Investment Company.

No-one disagrees that there is a need. Nothing seems to have been able to induce our current banks to raise their game and back British industry. What has been missing is urgency in building the right institutions, the proper scale in assessing the money needed and, thirdly, due attention to the spatial dimension of investment across the UK – the will to re-balance the UK economy by tackling areas outside the south east of England. The only person who can claim credit for addressing the last of these issues is Lord Heseltine, whose recent report aimed at England called for a massive decentralisation of funding to Local Enterprise Partnerships to “reverse a century of centralisation”. The applause from his own Government seemed muted.

Those seeking better, decentralised solutions will be cheered by the paper produced by Joe Cox for the Labour-aligned pressure group, Compass, on what Britain can learn from the German recovery, and particularly its first chapter on local banking.

Cox argues that “British banks aren’t just too big to fail, they’re too big to exist, or at least exist and function effectively”, and that this is “a fundamental reason why even part nationalised banks (RBS and Lloyds Banking group) are ill-equipped to fund SMEs. Lending and speculation based on computer models requires less expertise and fewer structural costs per transaction so universal banks are not incentivised to serve communities and business.”

The lesson he draws from German practice is that “Capital is embedded at a local level in over 400 public savings banks, known as Sparkassen, and 1,258 credit cooperatives operate according to local banking laws which ensure that these banks satisfy the credit demands of local business and pursue a business strategy that serves their geographical community.” This is in the form of a ‘public legal obligation’ Some have labelled the Sparkassen as ‘municipal mutualised banks’. They cannot be sold, and all surpluses are used to build financial buffers and to pursue wider social objectives. Their ‘dual bottom line’ means that they seek to make a profit, while satisfying the credit demands of local business. They also pay local corporate taxes.

In 2010 43 per cent of all loans to SMEs were provided by Sparkassen, whereas in 2002 our own Competition Commission found that 90 per cent of services to business were provided by the big four banks. That figure is almost certainly larger today.

In line with the conscious and beneficial tiering of banking in Germany, the Sparkassen exist not instead of but alongside a government-owned investment bank, KfW Bankengruppe, that has been in existence since 1948. Significantly, it is only 80 per cent owned by the federal government, with 20 per cent owned by the German regional governments, the Lander. The middle tier of Landesbank are linked to the Sparkassen.

The KfW is not unlike the Small Business Administration in the USA, the Business Development Canada and the Nordic Investment Bank set up in 1975 jointly to serve Sweden, Norway, Denmark, Iceland and Finland. The NIB’s total assets in 2011 stood at €24 billion, with outstanding loans of €14 billion for a block of counties of only 25 million people. Indeed, Britain is the only member of the G8 not to have a similar organisation. According to Cox, “KfW does not  pick winners, it provides an interest rate subsidy to commercial lenders who then deal direct with the borrowers.”

The KfW has an asset base of €442 billion and in 2010 made €28.6 billion available to German SMEs – most loans being for 10 years or even 20 years. This rather dwarfs  anything that George Osborne, or even Vince Cable, currently have in mind for this country. The Regional Growth Fund that operates across England has £2.6 billion at its disposal, while the Green Investment Bank is scheduled to have £3 billion available, although it will not have its full borrowing powers until 2015, and then only if public sector net debt is falling as a percentage of GDP. It is notable that while lending to business was falling in the UK, after the 2008 crisis Sparkassen lending to SMEs was increasing.

A consensus of a kind has emerged in the UK, but in classic British fashion it largely favours a centrally dominated institution with no local institutional roots and on a scale considerably smaller than the gravity of the situation demands. A World Bank report in 2003 found that the USA had 10,500 banks, Germany had 3,220 and the UK 452 – the UK figure will have included many London-based banks who do not operate at the retail end and often serve other parts of the world.

It is impossible, therefore, to argue that in the UK there is no space to create banks that have a regional focus. The issues should now be technical: defining the remit and the rules, the organisation and financial structures. We have already waited too long.

Geraint Talfan Davies is Chair of the IWA.