Could a regional banking system close the north-south divide?

Frankfurt, home of Germany's exciting banking sector. Image: Getty.

Britain’s struggling regional economies are long due a boost: the challenge now is how to deliver that through a form of progressive devolution.

Well, there might be some seeds of inspiration from the structures which underpinned the start of our modern age.

The industrial revolution is often presented as a transformation in manufacturing practice: a celebration of steam, engineering and factory organisation. In truth though, it was also a revolution in finance.

The outpouring of creativity in the late 18th century required financial support from the establishment of Lloyds of London during the Restoration and its subsequent expansion. It needed the creation of the first merchant banks, provincial banks in the major cities (by 1784 there were over 100) and the first building society in 1775. Although centred on London, independent financial institutions were present in all the major population centres.

By the 1920s, however, the contours of today’s banking system were apparent, with a dominant big five and a marginalisation of other players.

But there is an argument that a return to that previous model could make devolution work in the UK. In particular, the hope is that the creation of more local banks and financial institutions, similar to the Sparkassen movement in Germany, could revitalise regional investment.

National capture

It will not be a simple task. It is possible to legislate for a series of financial institutions with pre-defined boundaries, exemplified by the Credit Union Act 1979 – but this leaves the policy effectively in the hands of central government. The creation of the Phoenix Fund in 1999 gave us Community Development Finance Institutions, or CDFIs, designed to support entrepreneurship in deprived areas across the UK, but these have struggled to reach sustainability.

It was perhaps unsurprising when the coalition government moved away from regional solutions and launched the British Business Bank in 2012. That in turn launched the Northern Powerhouse Investment Fund in 2015 to support smaller businesses across the region.

Power base: the UK Houses of Parliament. Image: Kyoko Escamilla/Flickr/creative commons.

What this exposes is that centrally regulated financial institutions will always be at risk of national capture. By contrast the two most prominent federalised nations – Germany and the US – operate a dual banking system. In reality, this meant banking oversight and regulation was conducted at both a state and national level. So, are there blueprints here for Britain?

Development funding

Despite similarities in the US and Germany, the German approach has been more consensual between the different levels of the state and is known as cooperative federalism. In the US, the constitution’s silence on banking has resulted in a contest for primacy between the state and federal level, hence it is known as competitive federalism.

Sparkassen are savings and cooperative banks, not dissimilar to building societies or the TSB and the Co-op Bank. The main difference is that while the building societies concentrated on mortgage credit – and until 1979 were prevented from law from offering a wider-range of banking services – the Sparkassen were also involved in local economic development.

Crucially, they worked with the state Landesbanken for strategic funding to help businesses within their area. Their rootedness in community, which is defined in law, ensures they are embedded in their area’s mittelstand – those icons of German small business prosperity – which facilitates patient capital investment. Following the 2008 financial crisis, the Sparkassen maintained their investment levels in smaller companies while other financial institutions in Germany were withdrawing credit. This is the kind of behaviour which keeps regional success stories successful.

Money talks. Banks don’t walk away. Image: Images Money/Flickr/creative commons.

Best interests

By contrast, in the UK, banks place greater emphasis on responding to market sentiment. That results in higher levels of short-term lending to businesses. It also means decisions are made for the good of the bank that may negatively impact on a specific community, with no local banking infrastructure in place to pick up the slack. The German model relies on banking regulation that restricts competition and the culture of a strong savings and anti-borrowing bias among the population – something which UK banking culture and conditions have served to dampen in Britain.

So, perhaps there is a better model in the US? Here, competitive federalism has enabled state legislatures to carve out the space to support local strategic businesses. They are also able, when necessary, to underpin struggling institutions.

Even today, with the pressure of consolidation and internationalisation of banking services, the US is home to over 4,000 community banks dedicated to serving the very specific needs of their home cities and states. Alongside this, the federal government introduced legislation and regulation to ensure the robustness of the banks and to protect consumers.

Most significantly the Community Reinvestment Act 1977 sought to tackle racism in lending practices by forcing banks to publicly disclose their loans on a zip code basis. Not only have the banks changed their behaviour, the evidence of under-served markets has provided the impetus for the new generation of community development financial institutions dedicated to local economic development of some of America’s poorest communities and groups.

Land of improved opportunity. Image: Xiquinho Silva/Flickr/creative commons.

Hoping for a crisis

Although effective in enabling local economic development, neither the German or American models can be easily transplanted to the UK: the societal and cultural differences shouldn’t be underestimated. Even if these can be overcome, policymakers still have to define the nature of federalism in Britain.

Of course a UK government can allow the devolved authorities to establish banking services, but this would be within parameters set by City watchdog the FCA and so subject to national oversight and ultimately control. If a regional bank in England drifted too far from national objectives, it would always be at risk of being pulled back into line by the regulator and the Treasury.

A genuine form of federalism would require the UK government to surrender and transfer some responsibilities for the regulation of regional agencies. Given the historically centralised nature of the UK, and the weakness of local government in this area, this would seem a highly unlikely outcome.

But one lesson from Germany and the US is that this often comes about in response to crisis. One can imagine the FCA refusing to rescue one of the banks based in Scotland that the Scottish government would consider essential for the Scottish economy. The ensuing tussle between Edinburgh and Westminster could force the regulatory changes we would need.The Conversation

Karl Dayson is associate dean for research and innovation in the School of Arts and Media, University of Salford.

This article was originally published on The Conversation. Read the original article.


CityMetric is now City Monitor! Come see us at our new home

City Monitor is now live in beta at

CityMetric is now City Monitor, a name that reflects both a ramping up of our ambitions as well as our membership in a network of like-minded publications from New Statesman Media Group. Our new site is now live in beta, so please visit us there going forward. Here’s what CityMetric readers should know about this exciting transition.  

Regular CityMetric readers may have already noticed a few changes around here since the spring. CityMetric’s beloved founding editor, Jonn Elledge, has moved on to some new adventures, and a new team has formed to take the site into the future. It’s led by yours truly – I’m Sommer Mathis, the editor-in-chief of City Monitor. Hello!

My background includes having served as the founding editor of CityLab, editor-in-chief of Atlas Obscura, and editor-in-chief of DCist, a local news publication in the District of Columbia. I’ve been reporting on and writing about cities in one way or another for the past 15 years. To me, there is no more important story in the world right now than how cities are changing and adapting to an increasingly challenging global landscape. The majority of the world’s population lives in cities, and if we’re ever going to be able to tackle the most pressing issues currently facing our planet – the climate emergency, rising inequality, the Covid-19 pandemic ­­­– cities are going to have to lead the way.

That’s why City Monitor is now a global publication dedicated to the future of cities everywhere – not just in the UK (nor for that matter just in the US, where I live). Our mission is to help our readers, many of whom are in leadership positions around the globe, navigate how cities are changing and discover what’s next in the world of urban policy. We’ll do that through original reporting, expert opinion and most crucially, a data-driven approach that emphasises evidence and rigorous analysis. We want to arm local decision-makers and those they work in concert with – whether that’s elected officials, bureaucratic leaders, policy advocates, neighbourhood activists, academics and researchers, entrepreneurs, or plain-old engaged citizens – with real insights and potential answers to tough problems. Subjects we cover include transportation, infrastructure, housing, urban design, public safety, the environment, the economy, and much more.

The City Monitor team is made up of some of the most experienced urban policy journalists in the world. Our managing editor is Adam Sneed, also a CityLab alum where he served as a senior associate editor. Before that he was a technology reporter at Politico. Allison Arieff is City Monitor’s senior editor. She was previously editorial director of the urban planning and policy think tank SPUR, as well as a contributing columnist for The New York Times. Staff writer Jake Blumgart most recently covered development, housing and politics for WHYY, the local public radio station in Philadelphia. And our data reporter is Alexandra Kanik, whose previous roles include data reporting for Louisville Public Media in Kentucky and PublicSource in Pittsburgh, Pennsylvania.

Our team will continue to grow in the coming weeks, and we’ll also be collaborating closely with our editorial colleagues across New Statesman Media Group. In fact, we’re launching a whole network of new publications, covering topics such as the clean energy transition, foreign direct investment, technology, banks and more. Many of these sectors will frequently overlap with our cities coverage, and a key part of our plan is make the most of the expertise that all of these newsrooms combined will bring to bear on our journalism.

Please visit going forward, where you can also sign up for our free email newsletter.

As for CityMetric, some of its archives have already been moved over to the new website, and the rest will follow not long after. If you’re looking for a favourite piece from CityMetric’s past, for a time you’ll still be able to find it here, but before long the whole archive will move over to City Monitor.

On behalf of the City Monitor team, I’m thrilled to invite you to come along for the ride at our new digs. You can follow City Monitor on LinkedIn and on Twitter. If you’re interested in learning more about the potential for a commercial partnership with City Monitor, please get in touch with our director of partnerships, Joe Maughan.

I want to thank and congratulate Jonn Elledge on a brilliant run. Everything we do from here on out will be building on the legacy of his work, and the community that he built here at CityMetric. Cheers, Jonn!

To our readers, on behalf of the City Monitor team, thank you from all of us for being such loyal CityMetric fans. We couldn’t have done any of this without you.

Sommer Mathis is editor-in-chief of City Monitor.