We are ahead of you in Lewisham. Peopel Before Profit – our local political party – las been arguing for our own Bank of Lewisham.

We want to a firm infrastructure for the local economy in order to encourage and develop small business. A council-backed Bank of Lewisham would be central to this.

The bank’s main function would be as an investment bank – long term and short term loans and, where appropriate, equity partnerships. It would also act as a bond bank that would raise money through the sale of bonds. This could be used to raise capital to finance local government infrastructure projects.

The Bank of Lewisham would have aims of promoting employment and prosperity by providing finance to local business. Investment would be directed towards projects that would assist the development of the local economy as a whole i.e. to expand employment in range of diverse and distinctive enterprises.

The capital base for the bank would be the council’s assets. These are considerable and, in relation to the loans that would be made, far in excess of the capital base of private sector investment banks. This would make our bank extremely robust and virtually immune from the difficulties that are currently plaguing financial markets. Such a bank would help to stabilise the local economy.

A Bank of Lewisham would:
• Improve local business’s access to finance – something at which commercial banks are notoriously bad
• Build a team of business advisers who had an extensive understanding of the local conditions. Bank employees could provide not only finance, but also support and advice for enterprises in the tradition of the ‘old school’ bank manager. This would not only assist in realising the start-up of promising projects it would discourage ones that were likely to fail.
• Monitor and control cash flows. Banks are a conduit for the movement of money. As such they are ideally place to spot problems before they become too serious to tackle. Together with guided investment, this would make a bank a powerful tool in helping to manage the local economy.
• Oversight by the Bank would also help prevent both tax avoidance and money laundering.

The state bank idea is long overdue in this country. Discussion of it is more than welcome. Ellen Brown for Chancellor, eh lads?

BB

long backed by me and supported by Robert Skidelsky and Gerry Holtham amongst others…Oswald Moseley…. Mussolini ….

Maybe there is room for a little one, the problem is that once you set up a state organisation we have found that not only can you never get rid of it but it grows . Look at the absurdity of the BBC and the NHS
How about a novel, idea, why not make it more rewarding to do something useful than slob about on the state payroll. We are getting nowhere fast as long as teachers easily out earn entrepreneurs barring the top super successful few.

PS- Duncan can I take this admission that New Labour destroyed the supply side of the Economy as a step in my direction you have not previously admitted there is such a thing

A well balanced article, Duncan. I think some of the things that George @ 1 mentions are important and promising at the local level. I invest in new start-up firms, which are usually university spin-outs. They have a failure rate of 70-80%, so commercial banks can’t be expected to provide them finance. Private equity is the only way that they can get capital to get off the ground. Local investment that George speaks about to assist development is very much a positive.

Clearly, things are turning your bearish way with the release of the PMI surveys. Interestingly, Japan where much of the decline in the PMI’s started has reversed and is moving in the opposite direction to the European and US PMI. A leading indicator? Things in Italy and Spain are not looking good and they have the potential to cripple the whole world economy. The Eurocrats congratulated themselves on job done a few weeks ago and left for vacation. Did not last long did it?

The economy requires a lower level of money supply growth in an environment of negative interest rates because money velocity increases. If there is a problem with lending it is the SME sector, particularly for small businesses. It is far from clear how a State Investment Bank would help them as they probably would be concentrating on large firms and projects. Large firms have lots of cash on their balance sheets and can easily access capital. Share buybacks is an indication that they don’t know what to do with the cash that they already have. Maybe if you gave an indication what you actually want a SIB to do that is not already being done would be helpful. There are demand and supply side problems in the UK economy. Some sensible, smart and targeted policies by the government could help. What would be useless is the government just throwing money at the problem trying to pick winners.

“But the UK does have a supply problem”

So after a decade of expensive Labour “investment” in the economy, we end up needing supply side reform? Surely shome mistake! What was all that deficit spending for from 2002 onwards, if not improving the supply side? Was it all wasted?

And yet, your solution for the demand problem is… wait for it… a State Investment Bank.

You Could Not Make This Stuff Up.

@1

A bank of Lewisham? Who will pay if businesses default on loans? Lewisham Council tax payers like me presumably.

Exactly how big is Lewisham before profit? Apart from this blog I have never heard of you. Probably a good thing.

I disagree. A *state* bank? Er…

No, open up retail banking. Let all kinds of companies start offering retail banking and small loans.

And investment is something which can come out the private sector. Let the government do what only IT can. Let’s take, for example, tax breaks in media. The film tax break returns £11 in tax, alone, for every £1 put into it. The games tax break was “only” going to return £5 for each £1 put into it, and secure about 1 billion in investment.

Instead, the games industry in this country, with it’s cancellation, has bled about £2.5 billion in investment and closed studios since the election. Reinstating the tax break (and let’s be clear, the companies with successful games industries back them with tax breaks) would allow the trend to be, at least, halted.

(Not that Film wasn’t attacked, the abolishment of the UKFI – at 400% of it’s annual income – has created chaos, the worst year in films since 2003 in this country and lasting damage in one of the few bright spots we had!)

@5 – Tory damage lingers for decades. Thatcher’s effect on much of the North still hasn’t been healed, and now new wounds are being inflicted. And your solution is always more pain, more suffering.

@7

What restrictions are there in setting up retail banks? Metro bank has recently started and aren’t Tesco’s ramping up their banking side?

You also have online companies such as Zopa offering loans.

@3: “long backed by me and supported by Robert Skidelsky and Gerry Holtham amongst others…Oswald Mosley…. Mussolini ….”

Try this:

“However it was with the idea of a state planning agency that [Stuart] Holland [Labour MP for Lambeth, Vauxhall 1979-89, political assistant in Downing St to the PM 1967/8, and shadow Financial Secretary to the Treasury 1987-9] hoped to show the new possibilities open to a more just economy. He looked to the Italian example of the IRI (the Industrial Reconstruction Institute), set up by Mussolini and used by subsequent Italian governments to develop the economy. This had, of course, already been tried through the IRC (the Industrial Reorganization Corporation) set up as part of the National Plan in 1966, but the IRC had been too small to have much effect on the British economy. A revamped IRC in the form of a National Enterprise Board would, however, have a major effect in stimulating the private sector through an active policy of state intervention and direction.”
Source: Geoffrey Foote: The Labour Party’s Political Thought: A History (Palgrave, 1997) p.311.

The trouble with state banks is that they are apt to become the soft target for political pressures to pour funds into ventures which look politically appetising but which turn out to be commercially duff. Before it was privatised in 1988, in one way and then another, governments had sunk £3.4 billions of taxpayers’ money into British Leyland, which was renamed the Rover Group to make it look more tasty. Meanwhile, we have three Japanese car companies with manufacturing plants in Britain – Nissan, Toyota and Honda.

On track record, government interventions in industry in Britain haven’t turned out well. Whatever happened to ICL, which was supposed to be Britain’s answer to IBM? Nuclear power and the Advanced Gas-Cooled Reactor while other countries went for the (less costly) Pressure Water Reactor? Nearly 80% of electricity in France comes from nuclear power.

The exception is Rolls Royce, which the Heath government took into public ownership in 1971 to save the company from collapse. The aerospace part was privatised in 1988 after being turned around and has done well since.

Absolutely agreed on the supply side. More competition, more provatisation, bonfire of the regulations and so on. Even lower marginal tax rates which is the US meaning of “supply side”.

But, umm, capital allocation by civil servants? Seriously? You’re proposing that as a solution to anything other than “how can we piss capital away?”

The French experience with Crédit Lyonnais, a state-owned bank since 1945, is an object lesson in demonstrating that public ownership of a bank guarantees absolutely nothing:

“By July 1997, French finance minister Dominique Strauss-Kahn could admit that the bank had probably lost around Ffr100 billion, or around $17 billion, in its colossal spending spree. Independent commentators have suggested that the debacle will end up costing the French taxpayer between $20 and $30 billion.”
http://www.erisk.com/Learning/CaseStudies/CreditLyonnais.asp

At one stage, in pursuit of its vaunting aspirations, the bank came to own the MGM studios in Hollywood.

Btw this is the same Dominique Strauss-Kahn who was until recently managing director of the IMF.

@10 As if bankers don’t know how to piss capital away themselves …

“Who will pay if businesses default on loans? Lewisham Council tax payers like me presumably.
“Exactly how big is Lewisham before profit? Apart from this blog I have never heard of you.”

If you haven’t heard of LPBP it’s probably because you don’t live in Lewisham.
On the more substantial point of who will bare the loss when lender default: obviously it would be the bank.

Why do small businesses fail?

People who set them up are “following their dream”. They lack the business experience and expertise to make the dream work. Often the dream has no basis in reality.

The other main reason is lack of capital. Even with a good idea and the right expertise it takes time to build a viable business. This makes small businesses dependent on the financial sector.

Commercial banks can make money out of impossible schemes by extending high interest loans or overdrafts and then pulling them when the entrepreneur’s own capital has been exhausted. The assets are liquidated and the Bank gets its capital back. Perversely, the financial sector can make more profit by financing failure (with high interest overdrafts and short-term loans) then by investing in successful ventures (through lower interest long-term loans).

The Bank of Lewisham’s aim would be to develop the local economy as a whole – not short term profit.

Anyone wanting to start, yet another, hairdressers in Lewisham would be politely told to look for capital in the commercial sector. However, a firm making solar panels would get a hearing. Once the bank had identified sound schemes it would then work to make sure they had the maximum chance of succeeding. That would mean help with tasks like record keeping and accounts, chasing up creditors (a big problem for small firms, especially when dealing with large firms). Above all interest rates would not be extortionate. They would not have to be because the reduced failure rate would mean less losses to cover.

This is not a utopian scheme. A lot of our members run their own business so we know all about the problems of SMEs from the inside.

@8 – Well, let’s look at Parliament’s consideration of this in April –

http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/61207.htm

The things I’d pick out are;

* support for smaller players and mutuals in general
* risk-based premiums for deposit protection (given new entries are likely to be low-risk players)
* lower capital requirements for smaller players – IF they’re willing to rule many sorts of investment banking OUT of their licence, hence lowering the risk profile of the bank
* completion as an objection for the FCA

And there’s this Deloitte report –

http://www.deloitte.com/assets/Dcom-UnitedKingdom/Local%20Assets/Documents/Industries/Financial%20Services/UK_FS_Opportunityknocks.pdf

* “The regulator’s will is central to the process of entering the UK banking market”
* About 20 different commercial contracts are required, some with pretty onerous requirements, for systems like Link and Bacs.
* Software platforms are still not ready for the UK market, with long adaptation times

I also believe that the FSA has to be far more open minded about internet-only companies applying for licences.

Hello all,

Sorry for the late replies.

Richard @4 – a decent services PMI today at least. Welcome good news.

Tim @10 – we’ve had this argument before, doubt we’ll ever agree.

All – there are many examples of successful state investment banks – the Nordic one, Germany’s KfW, Brazil’s.

I’m attracted to the idea as it – helps with immediate demand problems, helps increase investment and supports the private sector economy. Could also greatly aid in rebalancing the economy and in supporting regional growth.

“Germany’s KfW”

That’s the one that sent $434 million to Lehman *after* it went bankrupt, yes?

Gah, re-reading my post:

* COMPETITION as an objective for the FSA

@13

I am a Lewisham resident, hence why I pay Council tax in Lewisham per post 6.

Surely any losses made by state run busineeses will be picked up by the tax payer? You advise that the banks capital base will be council assets which therfore makes the proposed bank extremely robust.

So should there be large defaults what Council assets would you sell off first? Maybe some admin buildings, or maybe the Council’s fleet of refuse trucks?

Tim @16 – yes that one.

Stupid mistake included, results are strong.

http://www.kfw.de/kfw/en/KfW_Group/Press/Latest_News/PressArchiv/2011/20110407_49307.jsp

@16 at the risk of being repetitive, like the private banks never make bad investment decisions.

Cherry-picking is risible.

Fungus @13
“I am a Lewisham resident”

Then you are not taking an interest in local affairs.
The council is already selling off its assets.

Please pay more attention in future.