Sparkassen — A De Facto Glass-Steagall?

Ed Miliband has a very good idea to break the British lending freeze:

Ed Miliband is to make his firmest commitment to a regional-based economic policy when he proposes a network of banks around the country responsible for providing capital to businesses in their locality.

The proposals, due to be unveiled in a speech to the British chambers of commerce, mark a further attempt to map out a different industrial policy, some of which has echoes of plans for a revival of city regions set out by the coalition adviser Lord Heseltine.

Miliband will say it is time to stop tinkering with the banks and recognise a wholly new system is needed.

He will say: “We do not just need a single investment serving the country. We need a regional banking system serving each and every region of the country. Regional banks with a mission to serve that region and that region alone, not banks that are likely to say no but banks that know your region and your business; not banks that you mistrust, but banks you can come to trust.”

I would not support politicians interfering with the financial sector if the British financial sector was a successful model. But the country is still hurting from its utter failure in 2008. Back then, Ed Miliband’s predecessor Gordon chose to bail out the banking system. Had the financial sector been allowed to fail, then a new model would have been forced to emerge. But that wasn’t the case. Now, politicians must take responsibility for putting the banking system on a life support system. The current government’s attempts at reform have not succeeded in revitalising the economy.

Miliband’s idea approximates the German model of Sparkassen — publicly owned regional banks:

Supporters of the local banks claim that in 2011 total loans by the Sparkassen stood at €322bn (£280bn), whereas the total loan stock of Germany’s large commercial banks was only €177bn (£153.5bn). Like Britain’s large banks, Germany’s large commercial banks cut credit during the financial crisis; lending fell by 10% between 2006 and the middle of 2011. In contrast, the Sparkassen increased lending by 17%.

On the surface, regionalisation may be helpful in that British banks have become over-centralised and disconnected from the interests of their local customers. This may be one factor that can explain why local, small and new businesses are struggling to get credit.

But this is an even better idea than Miliband may realise. Why? Because so long as the regional banks behave solely as depository and business investment institutions, and not as investment banks, insurance brokers, hedge funds, shadow banks, or proprietary traders, or any of the other highly interconnective and risky activities favoured by today’s supermarket banks — then such a system acts as de facto Glass-Steagall-style separation between the riskier privately-owned national and international-level commercial banks, and the regional level business investment and savings banks.

Such a system also echoes the recommendation made by Nassim Taleb, to nationalise the parts of the banking system that act as a public utility, and deregulate the rest so it is free to gamble, speculate, succeed and fail without significantly destabilising business lending, public savings, and the wider economy.

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31 thoughts on “Sparkassen — A De Facto Glass-Steagall?

  1. Bank of Queensland ( Australian State Bank) is a Franchise model where the Branch Manager has an equity stake in the business.

    Local Branch Managers understand local conditions, especially if the business is reliant on local sales and the local economy.

    Bendigo Bank is a Victorian State regional bank which started out in a Gold Boom town – Bendigo Australia. It is community focused, and will go into small towns if the local population raises sufficient funds to make it viable.

    The one problem with regional banks is Bank Managers may become too risk averse, amplifying credit contractions, if the hear about softening business conditions. The good thing about TBTF banks is the business considers the national economy, preventing regional flash-points.

    • The one problem with regional banks is Bank Managers may become too risk averse, amplifying credit contractions, if the hear about softening business conditions

      That can happen, and sometimes that can be a very good thing, because it can limit bubbles.

  2. So Yorkshire Bank will be forbidden from lending to Lancashire?
    I better find another mortgage provider quick.

    You also seem to ignore that the German Landesbanks racked up massive losses investing in Mortgage Backed Securities and lending to foreign banks.

    Given that “ed” supports a supernational political and economic block, it seems bizarre for him to also support regional banks.

    It also doesnt mesh with his “spend to grow” policy either. If the North East of England tips in to recession, the North East Regional Bank will suffer greater than average losses to defaults. It will then simply lack the monetary resources to bank roll a credit based investment led recovery in the North East. And the booming North West would banned by law from lending into the North East.

    • So Yorkshire Bank will be forbidden from lending to Lancashire?
      I better find another mortgage provider quick.

      Different regions would have their own Sparkassen. If you don’t like what is on offer from a public regional bank there are still all the national and international commercial banks.

      You also seem to ignore that the German Landesbanks racked up massive losses investing in Mortgage Backed Securities and lending to foreign banks.

      It is only really a good idea if the regional banks are banned from engaging in this type of stuff, and are only permitted to engage in vanilla depository activities and lending.

      If the North East of England tips in to recession, the North East Regional Bank will suffer greater than average losses to defaults. It will then simply lack the monetary resources to bank roll a credit based investment led recovery in the North East. And the booming North West would banned by law from lending into the North East.

      If a regional bank suffers large losses from some kind of exogenous shock, then it can easily be recapitalised, either by other more successful regional banks, or the Bank of England. That is the nature of a public utility. It is important that malinvestments are liquidated, but there is no reason why other businesses (including ones that have not yet formed) should suffer from the effect of a credit freeze…

      • “engage in vanilla depository activities and lending”

        You mean the sort of activities that Northern Rock undertook? They had no Investment banking arm but didn’t work out too well for them.

        • ok, my underlying point was that the cause for it’s failure was simple retail mortgage provision which is in itself not really “casino” or any of the other investment banking rhetoric we hear spouted in the media and by our dear leaders. the failures were caused by the belief that any mortgage risk incurred could be packaged and flogged off to investors turning high street lenders into sales only mindset. It was less about strippy suited bankers in London and more about sales commission led high street banking staff. That and a certain bowler hatted lady on the telly who I recall trying to flog me 120% mortgages in 2007. None of that was “casino” led nor is Gideon’ electric ring fence going to be a bastion of defence against it happening again. In the case of the high street they were hoping to flog dodgy mortgages to bigger fools than them and it fell apart as soon as the investors wised up.

        • Their loanbook was not funded by deposits, but by securitisation issuance. Once the market turned for that, they were all in on a busted flush. This is almost the exact opposite of vanilla depository lending. Whether this was about aggressive retail salesmen in provincial branches or pinstripe-suited bankers is rather a moot point; it was about there being a market to sell MBS into. Vanilla depository and lending institutions do not have this issue.

        • We have all been sold the GFC as a consequence of investment banks “casino gambling” with retail deposits – hence “glass steagal is the answer” – but the simple truth is it was retail banks gambling with investors money via investment banks who once they wised up the house of cards fell. Perhaps the ring fence should be in place to protect investment banks from dodgy retail institutions.

          Personally I think regional only banking institutions would be a disaster for the reasons others have provided in the comments threads.

        • You’re missing the point. The “retail banks” you’re referring to ceased to be “retail banks” once they started acting like hedge funds. Retail banking in itself is sustainable and sound, so long as its activities are limited to boring depository and lending functions. The issue was the casino-isation of retail, not “retail” per se.

          Regional public depository/lending institutions are an excellent idea, and nobody has provided any substantial reason why there would be a problem. The main problem I can see is that Ed Miliband may go back on this idea, and implement something less good. Politicians very often have good ideas in opposition, which they ditch once they get into government.

      • Once your Pol’s get into this one, you could easily end up with a scheme to capitalize the infant savings and loan in exchange for the thrifts taking on riskier behaviors… Goodbye to Daves 3% dividend and hello to government garenteed loans. This is the government and banking industry throwing down a few crumbs, thus pacifying some into believing they are taking real action. That will make the commercial bankers jump for joy… and do nothing to correct TBTF….

  3. Buddy
    Assuming you believe banks need to be regulated
    What could possibly be less regulated than a bank manager lending on his own whim?

    • Being fired for under performing loans. However I note Hyman Minsky’s thoughts that humans can get caught up in greed, and lend based on previous experience. This creates credit bubbles, so I think some regulation is needed to temper human frailty. Bipolar human decision making is a fact.

  4. Pingback: Sparkassen — A De Facto Glass-Steagall? | Fifth Estate

  5. I don’t see that returning the retail banking industry back to the days when “who you know” was more important than “what you know” determined if a business had access to credit is an answer to no real growth.
    Maybe the real issue lies in why the failure rate of small business/start-up companies is so high.

    • I don’t see that returning the retail banking industry back to the days when “who you know” was more important than “what you know” determined if a business had access to credit is an answer to no real growth.

      Isn’t that exactly the model we have now, though? Well-connected TBTF banks get as much money as they like at ZIRP, new and small businesses get no credit at all because they don’t have access to the insider system, and because TBTF banks are engaging in ultra-tight policies. Germany’s regional banking model seems to generate the opposite of this…

      • You might be better served by comparing Sparkassen to US Community Redevelopment Act of 1977. From my recollection beyond limiting some risky speculative lending Glass-Steagall ended up creating a secondary/local old boys network controlled by local business and community leaders that effectively protected and enhanced the wealth of established interests. The 1977 Act did express a “mission” and increase lending to small business closer to Sparkassen and the public utility concept. As is usual the politics involved was messy and opened the door for deregulation of the commercial banking sector and repeal of Glass-Steagall in 1999. During the political discussion in the late 1970′s the concept of “Free Enterprise Zones” (Jack Kemp), deregulation meant to create a pro-business environment on a local and regional level was not politically attainable and was overshadowed by further regulation that morphed into the Fair Lending Act.

        • Exactly. Like a Regional Bank Manager approving a loan for a friend because they go to the same Masonic Hall. I am all for local decision making as local knowledge (People’s reputation etc) is superior, but some regulation is needed to temper exuberance or cronyism.

  6. I`m an old fashioned capitalist – the banks failed – let them go bankrupt and start again (and for good measure jail some of them i`d have gone to jail if I did what they did in my business) , and politicians can stop medling in business as they are really bad at it (perhaps some of them could be charged and jailed along with the bankers they bailed out). But in response to what ed milliband was saying the following program on channel 4 was quite intersting, entertaining and depressing- again showing how little of the “free enterprise” economy is left.

    http://www.channel4.com/programmes/bank-of-dave

  7. perhaps we are all railing at the wrong problem – maybe we need new governments, ones that will let the banks fail (a bit more like the icelandic goverment), this may need new political parties- how that could happen in todays society is a question ive no idea how to address.

      • Would the use of extended “Anti Trust” laws be a better route to take” (Simon Johnson/Zephyr Teachout) ? Add size as a variable to the existing quality of product focus in the existing framework. This route might kill two birds with one stone, renew the debate over economies of scale vs economy of over scale and force banks to offer products and make loans that accomplish much of what you advocate.

  8. As the nature of human violence towards other people can not be through its transmission vehicle [e.g., a gun], the centralization of banking only makes its pathogenesis more virulent. It is the nature of money and its use that defines the etiology of this dis-ease that has caused sepsis in this gravely ill economy.

    Understanding the nature of the dis-ease process, and you can begin to root it out. Although limiting the infection to one of two limbs may be preferable to the entire organism succumbing, it seems to this observer that eradicating the dis-ease completely would be highly preferable.

    This can only happen when each individual is the sole owner of their own labor-value earned.

      • I would agree that any improvement is a step in the correct direction, but it’s just difficult to listen to people who will settle for a more benevolent master.

        • “More benevolent master” The UK will probably unload servicing the student loan market on the new regional banks… the defaulters will be easier to find and can be forgiven quietly.
          Upside is more people will be able to lunch with their Banker…. Kind of warm and fuzzy isn’t it….

        • University education has to be the poster child for this era of gross financial abuse. Higher education needs to be affordable for young people without the financial parasites becoming involved.

          If you can not allow student to go to school debt-free [putting themselves through school w/ a part time job], then the school is TOO EXPENSIVE.

    • Thanks for the link.

      In my view, these are critical points in light of Basel 3. Aside – Basel 3 has risks as Sovereign Bonds, in my view have unacceptable risk as capital. I recall in Basel 2, Home mortgages go very favourable weighting. We saw how that panned out!

      From the link:

      “10. The sizable nonequity component in banks’ capital structure together with the
      low internal capital-generation capacity will make it more challenging for some
      German banks to meet the new Basel III capital requirements.

      14. Capital requirements do not recognize the contingent liability—or the
      diversification gains—generated by the system of mutual guarantees.

      19. The availability of retail deposits generally contributes to the stability of credit
      supply. At the aggregate level, loans to customers are mostly funded by deposits and
      borrowing from non-banks, which allowed a relatively stable credit supply throughout the
      recent crisis (See Figures 1 and 2). Nonetheless, significant differences in the funding
      structure exist across the system. Smaller Sparkassen and cooperative banks benefit most
      from a large and stable access to household deposits. Given the importance of Sparkassen
      and cooperative banks—together providing more than half of the total credit to domestic
      non-banks, such a sound deposit base reduces the risk of a credit crunch. Larger private
      commercial banks and the LB, on the other hand, rely to a greater extent on less stable
      wholesale funding. Going forward, tightening liquidity regulation and the stricter demand for
      collateral in some segments of the covered bonds and securitization markets, together with
      the relative shortage of unsecured funding, could lead to greater competition for deposits.”

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