Mick Brown and Pat Conaty make the case for supporting a Public Bank for Wales.
With due care, but Yes.
The positive thrust of PPIW’s report to Welsh Government on the benefits and viability of a Public Bank for Wales is to be welcomed. The report reviews prominent international examples of public banking, and finds evidence to suggest strong reasons why Wales might benefit from the creation of a Public Bank:
- Better access to investment for SMEs and regional economic development
- Reduced dependence on private capital
- Retaining money (and jobs) within Wales
- The ability to “create money”, rather than recycle funds.
The report introduces the “money creation” capability of every fully constituted bank, but the beneficial implications deserve more prominence. Prior to a 2014 Bank of England report on money creation, very few people appreciated that as much as 95% of the money circulating in the UK economy is based on an act of accounting that matches every loan out with an equal deposit in the borrower’s account. As the money is paid back, the deposit is reduced and the money is uncreated. As things stand, in the UK, this creative and profitable capability sits only with private interests. It is surely time to let the public interest have a share.
In terms of access to investment, the report notes that potential borrowers who are close to the City of London do better than those much further away. Therefore, “a public bank…creating money with an explicit regional objective, could boost SME lending and regional economic development”.
This is not just a question of proximity, but of the mind-set of the lender. Too often, lenders look for low risks and quick returns. Wales needs lenders who can use local knowledge and long-term criteria when assessing applicants. As the report says, “Public banks with an explicit community objective could be able to process soft information that could boost SME lending in Wales”. This could also stimulate demand for investment, and encourage indigenous enterprise.
The report questions whether there is demand for investment in Wales. But the wrong lenders reduce demand. Professor Jones-Evans’ 2014 report estimated some £500m in rejected funding applications. With grave uncertainty ahead, there is little to suggest that the City will gear itself up for investment demand in Wales. We need a banking system that is responsive to Welsh needs and aspirations, and less dependent on the private lender.
Locally responsive and long-term-oriented investment is needed not only for SMEs but also social and environmental businesses. Germany’s public banking system has been pivotal to its green energy transformation and 300,000 green construction jobs. As a country seeking to build for the well-being of future generations, we need to have our own hands on some long-term financial levers. A money-creating Public Bank for Wales would be just such a lever, encouraging investment for the good of our people and environment.
Such investment could also be extended to infrastructure and public services. Currently public bodies underwrite private investments; offer up large profits from the public purse; and carry the can during market crises. A Public Bank could work with local authorities and others on long-term investment strategies that put the public first. This is not wild-eyed Marxism. The highly successful Public Bank of North Dakota serves one of America’s more conservative states.
A key to the success of North Dakota is that its Public Bank has the legal power to create money, just like private banks do everywhere. Rather than simply lending their capital, like development agencies or revolving funds, they can leverage their capital. In a UK context, an initial start-up investment of say £10 million could create up to £100 million for loans. The initial start-up capital only needs to be invested once. Subsequently, the bank not only repays the original investment but generates returns, year after year, for its original investors. In a Public Bank for Wales, these could include Welsh Government, Local Authorities and other interested bodies.
The report clarifies that the new Development Bank for Wales will operate a revolving fund and neither take deposits nor create money. We wish it only well in its important role as a development agency. But it and other Welsh finance institutions would be much strengthened if they had a full Public Bank to work with too: a bank that creates money, in Wales, and for Wales.
Is such a Bank viable? The PPIW report quite rightly calls for further research, and we likewise encourage Welsh Government to move to the next stage of exploration. Wales needs to learn from other’s mistakes, to properly understand our own evolving context, and to be diligent.
But doing nothing also holds risks. Wales has the opportunity to be in the forefront of place-based banking developments in the UK, and is uniquely able to align such developments with the values and principles of its ambitious and over-arching laws. It would be a serious “opportunity cost” if we failed to explore and embrace this potential, and found ourselves stranded on the financial margins in years to come.
All articles published on Click on Wales are subject to IWA’s disclaimer.
There is no question that the current banking system does not serve the needs of the Welsh economy, come to that neither does Finance Wales. The optimism of the contributors is to be admired, but in reality a publicly owned investment bank will not address the funding issues raised in this article.
In August 2016 Click on Wales published an article written by me that presented the many problems with such an idea. There is little point in again rehearsing the arguments contained therein, I suggest that those who read this, read that.
My main concerns, aside from the many structural and legal issues raised, were twofold. First, that any such bank would be staffed by risk averse bankers or civil servants not familiar or comfortable with the type of risky lending for which such a bank would be created. Secondly, it would be constrained by the very fact that it is publicly owned, and, like the WDA of the past, subject to political interference.
In September 2016 I followed up this article, presenting the case for a Wales Stock Exchange -again I suggest that those who read this, read that. This is a far more exciting, innovative and above all achievable way of addressing at least some of the funding and investment issues raised. But far too imaginative, because it might achieve something.
If we had a Wales stock exchange wouldn’t it then make sense to have a Bank of Wales with private and with public stake/shareholders and staff qualified for both conservative bank management and for daring, risk management strategies? I am not a banker but as there’s a London stock exchange and a Bank of England, why not something similar in Wales?
If we had a Wales stock exchange wouldn’t it then make sense to have a Bank of Wales with private and with public stake/shareholders and staff qualified for both conservative bank management and for daring, risk management strategies? I am not a banker but as there’s a London stock exchange and a Bank of England, why not something similar in Wales?
Well I’ve just read Dr Bell’s comments from August 5th 2016 where he makes many interesting and critical points about the realities of setting up and operating a public investment bank. He also points to other weaknesses such as a lack of financial literacy in Wales, and the needs of small businesses to have access to small sums of money that also don’t result in them being hampered by debt. What is the need for financial literacy? Is it goid enough to be a listener of radio four’s Money Box programme, or are we talking about in-depth understanding about banking, business, and international finance?
Let me be clear any piece of research into the complex issues associated with the market for capital and the means of accessing it, especially for Welsh companies, is to be welcomed. This work conducted by the Public Policy Institute for Wales adds to our understanding. However like a number of previous initiatives I am not convinced it has asked the most appropriate questions. Also not for the first time it does not seem to acknowledge the existence of regulatory and other conditions that must be met if a new institution is to get off the ground, yet alone be successful.
As an example of the need to ask the most appropriate question take the issue of SME funding. There is a consistency stretching back to the Macmillan Commission Report of the 1930s right through to the more recent Vickers Commission work on the British banking sector that reveals a gap for what is called patient capital. In other words finance that takes a longer term view of a company’s commercial prospects. Equally the existence of this gap is recognised as impairing productivity performance and growth. A Welsh public bank might help remedy the circumstances, which I suspect have an impact upon Welsh firms across many different sectors. But the very existence of a public bank alone will be nothing like sufficient and may actually be harmful if it makes poor investment decisions. Equally if bridging the patient capital gap is the public policy priority there may be more effective ways of addressing it.
Secondly one of the responses of the regulators to the banking crisis was to tighten the capital requirements of banks. Under the terms of what is known as Basel 3, banks, i.e. institutions that accept deposits, now have to hold more liquid capital. If those calling for a public bank wish to ensure their ambitions flourish they need to address one simple question; who will provide the hundreds of millions of pounds to capitalise a new public challenger bank? The fact this was not even mentioned in the PPIW report suggests the case has yet to be proven.
I think perhaps a brief reply is appropriate. Alice’s comments are interesting – although not necessarily easy to accomplish,and indeed part of the challenge – a Stock Exchange would require far more detailed knowledge of finance, business and management than simply a lending institution such as a bank.
I’d like to point out t Reformed Banker that in my original article I did indeed question where the capitalisation would come from – a Wales Stock Exchange maybe….
The Finance Wales ratio of £383 invested with £75.3 million written off over 15 years needs careful examination before any more taxpayers’ money is committed to yet another Welsh vanity project.
JRW expresses himself with his usual positivity and charm. On this occasion, though, I agree with him. Finance Wales has not been a conspicuous success, partly because of political interference. They have been afraid of political hostility and they have not succeeded in hiring the right people. Why would a Welsh public bank be any different? This is another suggestion for an institutional fix without reflecting on the deeper issues.
I am not convinced the authors understand why banks create money either. Surely clearing banks can create money because if they run short of reserves they can borrow from the Bank of England as lender of last resort. A non-clearer without that facility would be limited in how much it could lend by its capital, deposit base and its ability to borrow in the market. Wales can’t just plant a money tree, bank or no bank.