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Are regional banks necessary for the health of the economy and are they set for a revival?
There was a proud tradition of building societies and then banks in the North of England.
Some of the greatest names were those of Northern towns and cities and they enjoyed an image of integrity, reliability and prudence. Northern Rock came to typify that image and in truth played upon it. Sadly, in the banking crisis of 2008, it betrayed that heritage when it was found that its operations could no longer provide the income it needed to meet loans it had borrowed on the money markets. It became the first British bank in 150 years to fail due to a bank run.
To many the betrayal seemed so much worse because this once great northern institution, which had seemed to exemplify prudence and conservatism, was brought low by the kind of casino banking which tarnished the whole sector globally.
This mattered for a lot of reasons, one of them being that it marked another nail in the idea of regionally based banks. Once every region had boasted several banks and they had financed the Industrial Revolution. However, consolidation led to their concentration in London and Edinburgh and their ties even to the UK came into question, with their burgeoning overseas interests and even reports that HSBC would base itself elsewhere.
At the same time these major banks were reducing their regional presence, along with other financial institutions. Only a generation ago, major provincial centres such as Newcastle were the home to regional offices of national firms of accountants, venture capitalists and banks, but these institutions have retreated to London, or their regional centres have been reduced to little more than large branches, with little autonomy. More and more economic and financial power has been draining from the regions to London and the South East.
This is becoming an increasingly important political, economic and social issue, as it is increasingly being recognised that healthy regional economies depend on healthy regional banks.
Anthony Thomson, founder of Metro Bank and Atom Bank argued for regional banks as far back as 2013, pointing out that the UK is not typical in its concentration of banking. In 2013, 67% of banks were regional in Germany, 57% in Japan and 34% in the US. In the UK it was 3%.
He put the case for regionally-based banks, rather than regional banks. Headquartering and staffing costs for banks in the regions are about 20% lower than in London. At the same time the move to internet and mobile banking make geography less relevant.
“I believe that we shall see a resurgence of banks, based in regions, providing local employment and credit, but using telephone, internet and mobile technology to extend their reach nationally.”
He was supported by the MP for Hexham, Guy Opperman, who wanted “to see created a multitude of small local banks”. He believed it to be unhealthy that the six largest UK banks had more than 75% of the UK current account market and that this was serving the British public and their businesses poorly. He compared the UK unfavourably with the US, where, on average, every branch serves on 3,400 people, whereas, in the UK every branch serves 5,200.
The call for regional banking crept up the political agenda. The think tank Demos found a major regional imbalance in the number of SMEs between North and South of England and in their ability to access finance, and it highlighted how the big banks’ responsibilities to shareholders discouraged them from taking on the less profitable loans that smaller businesses needed.
It recommended the Government fund the British Business Bank to channel investment into an independent network of regional banks with a remit to support economic growth in their communities through lending to local businesses.
This would help to iron out the imbalance between the regions and London and the South East. In England, rejections rates for SME lending were highest in Yorkshire and Humber, the North East and the North West. The flip side of this was that the areas where entrepreneurs were least likely to be forced to inject their own funds into the business were the West Midlands, the South East and the South West.
Demos pointed to the Sparkassen model of German savings banks and pointed out that Germany had some of the lowest rejection rates in Europe for SME loan applications, while the UK rate was above the European average.
The idea was taken up Ed Miliband, then Leader of the Opposition, who called for a network of lenders in every major region, based on the Sparkassen model. These banks would have a duty to promote local growth and only lend to firms operating in their own areas.
In recent years much of the heat seems to have gone out of this debate. The reason would largely seem to be because the problem is being addressed. Not in the way, perhaps, that Ed Miliband or Demos envisaged, but on the lines of Anthony Thomson’s vision.
For some time, HSBC’s first direct has been based in Leeds, providing national banking via telephone, internet and mobile, and it has the highest customer satisfaction scores of any big bank in the UK.
Virgin bought Northern Rock in 2012, rebranding it as Virgin Money, with the headquarters of the savings and mortgage business in Newcastle, although this summer it was sold to CYBG. The newly enlarged bank will still be regionally headquartered - in Glasgow.
In 2016, Durham-based Atom launched, as the UK’s first bank built exclusively to provide its services through a smartphone app, with no branch network.
Already, by 31st March 2017, Atom had £538m of deposits from more than 17,900 savers and a loan book of £99m. It had total assets of £649m and raised £113m during the year from Spanish bank BBVA and investment funds Toscafund and Woodford Investment Management.
Now, there looks set to be another regionally-based bank in the North. BankNorth, which is currently raising funding prior to a full public launch, is based in Leeds. This new bank will concentrate on serving the SME marketplace through local PODs set up in major cities across the UK, each containing SME and corporate bankers, underwriters with discretion to sanction facilities locally and an in-house valuer. All loan applications will be managed locally and customers will have access to the local teams and resource in the BankNorth head office.
Not long ago, UK regionally-based banks appeared to be on the wrong side of history and had all but disappeared, but now the wheel is turning, driven by technology and consumer demand, and regional banks are making a comeback. Truly a banking revolution.