The Welsh Development Bank simply will not work

Dr John Ball explains his reservations about plans for a Welsh Development Bank.

I suppose it’s to be expected with the shenanigans after the surprise Brexit vote that normal business of government has, well, been of lesser interest. However, even when – if ever – the Brexit dust settles, the problems facing the Welsh economy will still be with us, indeed may even be worse. Before the Assembly election (which seems a lifetime ago now) the notion of a Welsh Development Bank re-appeared as part of economic policy by both the Welsh Labour Party and Plaid Cymru. Aside from being an idea that has been kicked around by academics and politicians since forever, this thinking is partly in response to critical reports on Finance Wales, rather than an original and innovative initiative and reflects desperation to be seen to be doing something about financing Welsh businesses.

The question nobody’s asking of course – if Finance Wales can’t get it right, what makes the Welsh Government think that a publicly owned bank can get it right?

The sorrowful state of the Welsh economy is well known and I certainly do not intend to revisit its many problems. However, any debate about the Welsh economy invariably involves the question of business finance; its relevance, availability, type and by implication, its potential role in stimulating the economy.

The idea of an investment bank has been around it seems since time immemorial and its most recent manifestation was just a few years ago with the then minister’s (unfulfilled) vision of a “people’s bank to bridge the funding gap.” Other initiatives have been attempted with only partial success – the Bank of Wales, the largely unsuccessful and questionable investment activities of the former WDA and its latest manifestation, Finance Wales.

The case for an investment bank is fatally flawed for a number of reasons and reflects the naivety (desperation?) of policy makers. No real thought has been given to the fundamentals such as the ownership structure. The bank will need to be a limited company so who will own the shares and will the ultimate arbiter, the Bank of England accept a bank “owned” by a national elected body? Reserve requirements (money held in reserve in case of major problems) mean that public funds will essentially be tied up doing nothing and above all, the source of the capital to be lent; presumably funds provided by the public sector or the already stretched block grant. Furthermore, a “bank” of whatever type or purpose will be constrained by the requirements of due diligence, the reality of security, the limitations and duties of the Banking and Finance Acts and whatever its well-meaning purpose, the need to make a profit to re-invest in future loans.

Banks by definition require bankers, creatures not noted for their risk taking or business acumen. And in any event, what is the point of working through the minefield of documentation that would be required in seeking assistance from a public sector bank constrained by the same paper mountain and safety culture as Finance Wales when the existing clearing banks can provide an answer quickly?

There is also the reality of politics. A publicly run and funded investment bank will, whatever the promises be subject to political interference. In my days with the WDA, it was all too often the case that a refusal to provide financial assistance, even though that refusal made excellent business sense and had been thoroughly assessed, resulted in a councillor or MP (no AMs in those days, mercifully) demanding to know why. Countless, wasted hours were spent on such matters. In addition, and strangely enough in defence of Finance Wales and its hapless WDA predecessor, politicians will invariably (and wrongly) measure its success in terms of job creation; seen as a major failing of Finance Wales which has apparently, achieved just a fifth of its (arbitrary) job creation target. Such a performance measure clearly flies in the face of business reality; investment encourages business growth and often productivity gains that result in no new jobs or indeed job losses. But the business remains successful and indeed grows.

Fundamentally, for many, small businesses, bank lending is not the answer; lending increases business debt and therefore its cost structure through the need to service interest and capital repayments, often in practice making the business less competitive. A particular area of concern is the necessity for new and small businesses to access small amounts of money. Research has consistently demonstrated that many start-ups and small firms lack security, require small amounts of finance and that a major drawback to growth is access not to loans per se but a form of short term overdraft. Addressing this particular issue requires a totally different approach along the lines of Swansea’s successful overdraft guarantee scheme of the 1980s.

The debate on the role of an investment bank and the general wider concerns on finance actually hide a far deeper problem; access to finance is simply one aspect of economic well-being. In reality, above all Wales lacks a business culture and a major cornerstone of such a culture; financial literacy.  

What is really required is a fundamental re-think of the role of and need for finance not based on fanciful ideas driven by an election. That’s the challenge. 

Dr John Ball is a former lecturer in economics at Swansea University and an expert on regional policy. An earlier version of this article appeared in the January 2016 edition of Cambria magazine

4 thoughts on “The Welsh Development Bank simply will not work

  1. Finally! An article that makes lucid sense about small business finance and the sainted Prof Jones-Evans’ ‘investment bank’ -an academic ‘wet dream’. I have been banging on about this topic for years (without success) in this and other channels. Thank you Dr.Ball.
    However, for any solutions or action on this I will continue to hold my breath and the economy will chug along as before and the brightest and best still disappear off East and West.

  2. I wonder why Click on Wales continues to publish “put down” articles like this when it comes to the economy in Wales? The government wants to show initiative in this field, why not provide the type of advice that gives encouragement. There are plenty of examples in the wider world than the UK, particularly after 2007-2008. There may also be heavy weight investors “out there” that are attracted to the idea of investing in an economy with a governance structure committed to sustainability as an operating principle.

  3. i agree with KR. The problems with public sector banks are well rehearsed. Yet in Germany they provide patient money so failure is not inevitable. And what is Professor Ball’s solution? A change of culture. Very helpful except he forgot to tell us where to find the magic wand.

  4. I’m not sure whether KR or RT (the latter not noted for past positive comments) actually read and understood the piece.

    I simply set out the problems a publicly funded bank would face. I did so for the simple reason that the such a badly thought through idea would be presented by the Assembly as an original and (supposedly) foolproof way of tackling the issue of business finance, which it is not. If my experience with the WDA and the problems of Finance Wales are anything to go by, the “bank” would be staffed by a combination of risk averse bankers and even more risk averse, career driven civil servants and subject to political interference. I also correctly pointed to the problem of structure, banking rules and perhaps more importantly, sourcing the necessary capital.
    I also suggested (KR please note) that a very real way of helping Wales new and small business sector is some form of guarantee, a very successful scheme used elsewhere in Europe – and tried successfully for a while in Swansea.
    In Germany (RT) the entire business culture is totally and fundamentally different to the third world mentally in Wales.
    And finally…..I like to think that the role of academics is NOT to be critical, but suggest ways forward, based of course on carefully weighed evidence. In 2008 The Institute of Welsh Affairs published a detailed economic strategy full of ideas on driving the economy forward. KR, you’ll never guess who wrote it…

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