Businesses need cash to grow. Small firms usually depend on two sources of finance: investors for their capital, or equity; and banks for their external borrowing. Large banks can often be reluctant to work with small or medium sized businesses, because the structure and cost base of large banks makes it more efficient for them to provide loans and other services to big businesses only. Small firms thrive in a financial system that includes small local banks. That’s good for employment, because small firms hire more staff per pound invested.
Banks are unlike Credit Unions, Mutuals or Building Societies, all of which are financial intermediaries. Banks are able to originate new credit, which is critical if an economy is to grow. Banks also have the advantage that they can allocate that new credit to productive industry, and because of their local knowledge, can do so on the basis of risk – i.e. the likelihood that a loan will be paid back. Instead of using automated, algorithm-driven credit scoring systems to arrive at loan decisions, Community Banks operate on familiarity and trust between the customer and the bank. Personal knowledge is retained because bank staff do not constantly change.
The Community Banking model helps avoid boom and bust cycles and banking crises, which usually arise from banks creating credit for asset transactions and speculation. Large banks often lend to large-scale asset purchasers, fuelling asset bubbles and contributing little to national income. In the UK, almost two thirds of the lending of the big 5 banks is for the purchase of existing economic assets, rather than the creation of new ones.
By contrast, local bank lending is usually to small firms and for productive purposes, contributing to job creation and real GDP. Because of the dominance of local Community Banks, Germany has avoided home grown asset bubbles and subsequent banking crises for the past ninety years.
To help local economies thrive and become more sustainable, we need Community Banks – authorised, full-service banks, but working for the benefit of the local community.
The UK banking system is highly concentrated, whilst in Germany the big high street banks have no more than a 12% share of the market. The system includes about 1,500 small banks with headquarters in smaller towns. Because each bank is smaller, they are comfortable dealing with smaller, often family-owned companies.
These small local banks come in two types: over 1,000 are local community-based co-operative banks, owned by their members, and these hold about 30% of all deposits in Germany. The rest are local public savings banks, and these hold almost 40% of all deposits. These Community Banks bring choice, top-quality service and financial liquidity to local economies.