Branching out

This is a blog that was originally published on the GovToday website on on Friday, 20 July 2012 14:52: http://www.govtoday.co.uk/local-government/19-economic-growth/11966-branching-out?feature=1

During the 1990s the reservations that earlier incarnations of Labour might have had about the financial services industry were cast aside. As Peter Mandelson famously observed, Labour was “intensely relaxed” about people becoming filthy rich, as long as they paid their taxes.In the wake of a financial crisis and the loss of office, however, it seems Labour has shifted its position – not least because its turns out many of the filthy rich were doing all they could to pay as little tax as possible. Responding to growing public distaste for financial excesses and malfeasance in an era of austerity, Ed Miliband and Ed Balls used the latest UK financial scandal – the fixing of LIBOR rates by employees of Barclays – to launch their reconsideration of the social and economic role of the banking sector. They began by arguing that retail and investment (or “casino”) banking should be forcibly divided along the lines of the 2011 Independent Commission on Banking’s recommendations. This, they said, would free the state from the responsibility of bailing out banks “too big to fail” and allow retail banking to be recast as a more benign supportive activity for the rest of the economy – “stewardship banking”, as Miliband called it. Thus banking would once again become a trusted and respected profession and public servant, on a par with teaching, medicine and law.Crucially, Balls and Miliband also called for a more competitive retail financial sector in the UK. Reasoning that such a move would improve the lot of consumers, they proposed the formation of at least two “challenger banks” that could be given a head start by forcing incumbents to hand over some of their branches to create a ready-made network.This suggests Labour is returning to the issues of financial exclusion and inclusion. Miliband referred indirectly to the US Community Reinvestment Act, hinting that government could force UK banks to disclose information on the geography of their lending behaviour to identify socio-spatial exclusionary practices at a time when, as he put it, “some of the most deprived areas of the country are almost entirely excluded from banking services”.This refocusing is undoubtedly to be welcomed. Academics from Nottingham University Business School’s Financial Services Research Forum have carried out significant research into this subject and have revealed how financial institutions’ pruning of their branch networks has concentrated disproportionately on areas of economic and social deprivation.And yet Labour’s recommendation that leading banks be compelled to hand over a significant proportion of their branches to new “challenger banks” may not be as punitive a sanction as it first appears. The enforced sale of branches to new competition may mean the loss of a few prime locations, but the erosion of physical infrastructure hardly goes against the grain of the UK retail banking industry. Branch divestment has been an objective of the leading banks for the past 25 years. Any such policy would therefore have to be careful not to expedite the shedding of locations that banks would be all too happy to abandon or where they may be maintaining a presence in part to avoid the bad publicity generated when they close the last branch in a community. This latter process has been well documented over many years by the Campaign for Community Banking. In addition, even if challenger banks inherited a representative sample of branches, banking is nowadays more than simply managing a portfolio of real estate. There was a time when branch networks acted as an effective barrier to entry within retail banking, because it was in branches that the key work of the business went on, where credit risks were assessed, money was deposited and loans were made; but those days are gone.The truth is that branches are no longer central to banking business. In the past 20 years or so their power has ebbed away. Now the core competencies of retail banking are having effective credit scoring and customer relation management systems, both of which enable banks to manage their clients at a distance. Moreover, banks are now not so reliant on branches for raising funds in the first place, as these can be raised directly in financial markets.The bottom line – and bottom lines, after all, are what banking is all about – is that the gift of a ready-made branch network, although obviously helpful, would not be sufficient in itself for any new “challenger bank”. Labour’s reconsideration of the banking sector certainly has the potential to be an important break point in public policy, but to be effective it requires close and consistent attention to the uneven geographies of financial provision and the contemporary practices of 21st-century retail banking.

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