Kevin Hollinrake is MP for Thirsk and Malton.
In a packed hotel meeting room in York during the teeth of the ‘credit crunch’ in 2008, three or four intrepid senior managers of a leading high street tried to keep order. For the bank to call the meeting to try and explain to a several dozen good local business people why they could not continue to lend to them was ‘brave’, to say the least.
These were people I had known for years, many of whose businesses had been in their family for generations. These were not chancers and speculators but prudent, knowledgeable captains of local industry who were at a complete loss that we were throwing the baby out with the bathwater.
Many of those business people closed their doors that day. They didn’t go broke, but had made their money and didn’t need to continue to take the risk of borrowing to invest, provide jobs and put money back into the supply chain. Multiplying this group of people tens, or hundreds of thousands of times across the UK and we can start to understand the scale of the issue and how much ground UK plc had to make up in the years following the Great Financial Crash.
Why did the banks do this? Because it was in their financial interests to do so. All the way from the CEO whose bonus and long-term incentive plan was tied to short term interests of their shareholders. Similarly, the performance and senior management team all the way down to branch level managers are judged and paid on in-year results. A European Central Bank study determined that total UK bank lending to non-financial corporates dropped by 25 per cent from 2008 to 2013.
As we know, the fallout in the UK wasn’t limited to not lending, in their headlong rush to restore their balance sheets, some banks were responsible for the tearing apart and destruction of thousands of viable businesses. Isn’t this inevitable, I hear you ask? No.
Many other nations do not wholly rely on shareholder-owned banks for their SME lending. In Germany, for example, business lending is dominated by 1,500 regional mutual banks and co-ops. During the same five-year period, German bank lending to domestic enterprises and the self-employed increased by around 20 per cent. The Swiss versions of these did even better, a 30 per cent increase. A significant proportion of SME finance in Japan and the US (6,500 regional mutuals) is also provided by the mutual sector. Sad, really – because the UK pioneered mutual finance back in the eigtheenth century and then lost interest and left it to others to fully recognise their value.
Mutuals provide a higher proportion of lending to SMEs, allocate more credit to the ‘real economy’, provide a full suite of banking services and a commitment to financial inclusion for personal banking customers.
In the US, Winsconsin, a state that in population terms is comparable with Yorkshire, has 139 banks and total assets of $62 billon and credit unions with assets of £47 billion. “Milwaukee’s state-chartered banks are well-positioned to continue supporting our communities, individuals, and businesses despite continued economic stress due to the COVID-19 pandemic,” said Wisconsin’s Department of Financial Inclusion Secretary, Kathy Blumenfeld, in August this year. Total assets increased 8.5 per cent from last year to $62.1 billion as of 30 June and ‘delinquent’ loans as a percentage of all loans decreased to 1.22 per cent.
Devolution to metro mayors offers the perfect vehicle for the establishment and growth of these regional mutual banks. They can be mission and geography-led, which could dovetail perfectly with the levelling-up agendas of, for example, Andy Burnham in Manchester, Andy Street in the West Midlands and Ben Houchen in Tees Valley. I very much hope the Mayor of the soon-to-be-established York City Region will also pick up this mantle.
The good news is that we don’t need to start from scratch. There is a network of 18 mission-driven mutual banks across the UK, led by the excellent Tony Greenham of South-West Mutual. They do need help, however, access to early stage capital and a reduced regulatory burden commensurate with their lower systemic risk are needed. Challenges of course, but given what’s at stake and the imperative of building an economy that serves our mutual interest, utterly compelling.