“Though the principles of the banking trade may appear somewhat abstruse, the practice is capable of being reduced to strict rules. To depart upon any occasion from these rules, in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous, and frequently fatal to the banking company which attempts it.” – Adam Smith, The Wealth of Nations
Do we expect our schools to be run as profit-making enterprises? How about our police services? Fire services? Hospitals? Roads? Rail? How about our utilities like electricity and water?
How you answer those questions will very likely correlate with the political party you most affiliate with and may even depend on where in the UK you live. Some of these may be precious, lifeline public services. Some used to be but were sold off. Some have always been privately run.
Some may work best as purely private institutions – where the market can use efficient competition to create choice and maintain low prices.
Some may work best as entirely public institutions – it can be difficult to “choose” another rail operator if the only trains at your station are run by one company. or if your house is burning to the ground because you had the “wrong” fire mark on the wall or because you can’t pay them to put out the blaze.
Some others may work in a “mixed” system – Perhaps you genuinely can choose to get your healthcare from an NHS hospital or pay for private treatment elsewhere.
How about banks?
We’ve seen the story in recent months that RBS is closing down many of its physical branches – including, in many instances, when it represents the closure of the last RBS branch in a community. Sometimes even the last physical bank.
There have been some small victories in the fight against this. The SNP’s Ian Blackford has recently won a one year reprieve for ten of the threatened branches in particularly vulnerable areas. These branches will be subject to an independent review into their long term viability. It’s only a small victory. Only ten branches out of more than 60 and there’s still no guarantee that any of them will remain open beyond that year.
Their reasoning for the closures has been that falling attendance at the physical branches – driven by the rise of online banking and cashless payments – is rendering them unprofitable. It’s a purely commercial decision on the bank’s part and, from that point of view, it’s one that may have a certain logic to it.
Except that we’re still a long, long way from a truly cashless society and many people – particularly older people – still rely on their branch. Local small businesses and certain sectors (like real estate) can also be more reliant on physical banking and, in the former case, less able to set up the digital services that larger companies can manage.
Of course, this whole episode is particularly galling in that RBS is – for all intents and purposes – a public company. It has been more than 70% owned by the UK Government since the bailouts of the 2008 Financial Crisis. The UK Government could quite easily step in and ensure that the bank does not close down these branches. Blackford asked about the possibility of Theresa May doing this at PMQs this week. The answer? “I welcome the decision to close these branches and the SNP are bad at rural broadband”. Seriously.
There are deeper issues within banking as well. We have never really addressed the problems of the Financial Crisis. Banks have been bailed out and they’ve inflated their reserves using free QE money but they’re still at the old tricks of highly leveraged finance and are still so entangled with the “real” economy that when (not if) they screw up again, they’ll probably be back begging for more money and the government will probably have to give it to them lest their failure bring down the savings and investments of all of their customers.
I’ve spoken before about the options for Scotland’s Central Bank which would manage the overal macroeconomics of the country (though, for good reason, would largely stand apart from it).
Common Weal has also published plans for a National Investment Bank which would invest in the economy and provide finance for things like energy, housing, hospitals etc. You might want to buy bonds and lend money to the SNIB but it wouldn’t be like a high street bank.
So why not one of those too? Gordon MacIntyre-Kemp is in The National today discussing the prospect of a National Savings Bank which would provide basic banking services such as deposits and lending but would fill holes left by “the market”. He argues that no system can be “perfectly competitive” and that these gaps will always arise simply because it is sometimes unprofitable to deliver services – especially to rural areas.
He’s quite right.
Private companies may provide services in your interest but that doesn’t mean that they are acting IN your interest – merely that your interest serves the interest of their shareholders…until it doesn’t.
So maybe we need to think about banking AS a public service. While we’re setting up things like a SNIB and a Central Bank. Why not a network of local banks owned nationally or locally and which have a mandate to provide banking services to their local area?
A boring bank such as this wouldn’t make nearly as much money as a commercial one, especially one which made most of its profits through casino finance, but that wouldn’t be the point. The point would be to be there no matter what the stock market is doing and not matter how hard those other banks inevitably crash.
We could go further. These local banks could be integrated with the SNIB to provide loans to local businesses based on bonds issued by the SNIB. Commercial banks cannot borrow more cheaply than the government can and the SNIB’s mandate of stable, patient finance for the common good would preclude horror stories such as those perpetrated by banks like RBS where perfectly solvent busineses were deliberately driven under so that the bank could aquire their assets (because when the appreciation on an office building is greater than the annual profits of the office, it’s in the shareholder’s interest for the bank to become a landlord)
Scotland’s local economies have been chronically underinvested for decades – especially in the rural areas. A scheme like this could be a transformational injection into our most deprived communities. And, of course, demand creates its own supply. If a local economy begins to grow then the demand for more banking services will naturally arise. It could well be that branches are empty not because people aren’t using them but because they can’t use them.
Of course, once these economies recover to the point where the private banks start to regain their interest in the area they might decide to try to come back. But if we build the National Savings Bank right, will they be able to?