In the UK, just five banks hold 85% of all current accounts. And of those, four of them are located within a five-square mile area of Central London. They’re all shareholder owned, run for private profit, and all combine their personal banking services with riskier investment banking activities – which is where they make the bulk of their profits.
In international terms, this isn’t normal. Britain’s banking and financial services system is one of the most homogenous and centralised in the world. There’s little choice, with the market cornered by a small number of players whose shareholder driven model prioritises fast profit over the public good.
While Brits have no choice but to settle for one of the big five (or one of the many brands under which they operate) for a simple current account or for more complex products like mortgages, our German neighbours are spoilt for choice.
On a recent trip by Co-operative Party representatives to Germany, we learned more about the thousands of individual banks that make up the banking sector in Germany, each catering to different communities and financial needs.
There’s the network of more than 400 local savings banks (Sparkassen), each independently and locally managed, and run for the public interest, rather than for profit. Or there are the more than 1000 co-operative banks, owned by their members and run on the principle of one member one vote. Or further still, the 300 private commercial banks, which are equivalent to most banks in the UK. These ‘three pillars’ make up the German banking system, which is one of the most diverse and resilient in the world.
So why does it matter?
There’s clear evidence that Germany’s banking system makes their economy more productive. Britain’s big commercial banks focus on using our money to turn huge profits via trading activities – lending to each other and trading within the financial system itself. Not-for-profit banks such as the Sparkassen, on the other hand, exist solely to support activity in the ‘real’ economy – lending to small businesses, providing mortgages, and so on.
The availability of this kind of capital encourages German businesses to invest in machinery, equipment, new technology, and other means of increasing output. The result is one of the most productive economies in the world, with an average German worker producing in four days what a UK worker does in five.
Add to that the huge risk and destabilising influence on the UK economy created by the presence of a small number of banks that are ‘too big to fail’, as well as the blatant ripping-off of customers by banks who take their position in the UK market for granted, and it’s clear that the broken British financial services system is strangling our economy.
If we want to create a fairer, more productive, successful, and equal economy, then it has to start with the banks and financial services.
Over the past few days, Labour & Co-operative MPs have been in Parliament, working to bring some of the models and approaches we saw in Germany to the UK:
Turn RBS into a mutual
The good news when it comes to transforming banking is that we, the British taxpayer, already own one. When the Royal Bank of Scotland, one of the UK’s big 5, went under in 2008, it risked taking the whole of the UK economy down with it. Instead, the taxpayer stepped in to bail it out – a bailout we’re all still paying for. While taxpayer intervention saved the bank itself, it’s done little to reform its culture or the fundamental problems in the UK banking system.
It’s an opportunity we can’t afford to miss. On Tuesday, Co-operative MPs, led by Chair Gareth Thomas MP, took to Parliament to press the case for turning RBS into a mutual – a not-for-profit building society, which, like banks in Germany, would be owned by its members, rather than shareholders, and run in the public interest. It’s about time the banks served us, rather than the other way around.
Stand up for credit unions
The UK credit union movement provides a glimpse of how a German-style local, diverse, and public-minded financial sector would look like in the UK. Since the first credit unions were founded among immigrant communities in the 1960s as a means of tackling financial exclusion, the movement has spread across the country.
There are now hundreds of these local financial co-operatives across the UK, each dedicated to serving a specific community – from police officers to airline pilots, to particular towns and neighbourhoods. But while it often seems the government sees credit unions as a stop-gap for the very poorest, we’re far more ambitious.
We want to support the growth of the credit union movement in the UK to a scale similar to the US, where credit unions hold billions of dollars of assets and compete on equal terms with mainstream banks. That’s why on Monday, Gareth Thomas and the rest of our group of MPs were in Parliament arguing for credit unions to be included in the government’s new ‘Help to Save’ initiative, and why they continue to work to remove the hurdles holding the sector back.
To give Britain the kind of economy it needs, five stale, profit-driven banks won’t do. There’s a huge amount we can learn from Germany and other countries, where a diverse, local banking system underlies a strong and dynamic economy.
But there’s no need to start from scratch. The means and the opportunity to make it happen here are already with us – it just takes imagination and political will.