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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