The Local First Model of Banking
Local First is assisting with the implementation of a Community Banking model across the UK.
By international comparison, the UK banking sector is unusually highly concentrated, with the top five banks accounting for over 90% of deposits. The problem of high concentration and lack of meaningful competition has been recognised over the past century by numerous banking commissions and official government reports, yet until now no solution had been found.
The solution is to introduce a different type of banks that operate differently and are dedicated to the local community.
Among the key features of these Community Banks are:
– Small scale: Small banks give loans to small companies, big banks mainly to big firms. For small and medium-sized enterprises to thrive, a healthy small bank sector is needed.
– Local geographical focus: The Community Banks are focused on their local geographical area and will be of the right size to lend to small and medium-sized enterprises (SMEs).
– Focus on long-term sustainability, not short-term profits: The German economy with its thriving SME sector has produced strong growth and a high quality of life for the majority of the population, not just a small elite. At the heart of this 200-year success story in the face of wars and desasters has been the 200-year success story of its Community Banks. Today about 70% of bank deposits in Germany are with the Community Banks (local public savings banks, the over 400 Sparkassen, and co-operative banks, the over 1000 Volksbanken and Raiffeisen Banks). They account for most of the SME lending. They have been profitable and successful, despite not aiming at short-term profits for shareholders and not paying bankers’ bonuses.
– Meanwhile, the Community Banks in due course will offer essentially all the services of the big banks, but without the incentive structure that makes dealing with the big banks often unattractive: there are no bankers’ bonuses and no commission-based ‘product sales’ targets. Instead the Community Banks offer services to their customers that are thought to be in their best interests.
The Community Banks are owned by charitable foundations that return profits to the people of the local community and which also prevent take-overs. In recent years the more than 400 Sparkasse local public savings banks of Germany gave over half a billion euros in charitable donations to their local communities per annum, supporting youth activities, sports clubs, arts, theatre, education, as well as community groups of all kinds.
The values-based Community Bank proposition will support SMEs by placing emphasis upon ‘productive’ lending, thereby stimulating the ‘real’ economy and creating local jobs. A virtuous cycle of growth is formed when a local, SME-orientated bank offers customer-centric, relationship-based banking services, with no bonus culture to misdirect staff intentions. As a result, economies dominated by community banks are more stable and less prone to boom-bust cycles and banking crises.
Local First’s challenger model is being implemented first within the county of Hampshire, with all deposits retained exclusively for lending within the county – rather than disappearing to offshore havens or America, to speculate on US ‘mortgage backed securities’ and the like.
The Local First model has been proven to work by the following similar success stories:
• Germany’s ‘Sparkasse’ chain of community banks and Volksbank co-operative banks, which were the only German types of banks to grow their balance sheets during the recent financial crisis, providing ongoing support to Germany’s SMEs (the ‘Mittelstand’ family firms, backbone of the economy);
• The strong US economy, which has been underpinned by thousands of community and local banks.
• The new challenger bank ‘Cambridge and Counties’, which has already exceeded its growth targets and has spread its operations from Cambridgeshire into neighbouring counties;
• The numerous local and regional banks that were supporting UK businesses during the Industrial Revolution, and which gradually were subsumed into the monolithic entities dominating banking services in the UK today.
Please contact us if you wish to assist us in achieving our UK banking revolution!