Common Good Economics, Seminar 2: Common Good Banking


Seminar Two:  Common Good Banking


On a great many metrics, the UK has an extremely strong and innovative financial services sector, which contributes significantly to growth, jobs and productivity in the wider economy. 

For example, it is well-established that measures of financial depth - such as the size of the banking sector, the market capitalisation of the stock markets and the scale of corporate debt markets - have an empirically strong relationship with per capita GDP and its growth rate.  This is because large and effective financial intermediation facilitates investment by mobilising savings and matching them to effective projects.

On most measures of financial depth, the UK scores highly.  It's banking sector assets in relation to GDP, at almost 400%, are higher than any country other than small offshore financial islands which are often linked to the City of London.  Its stock market capitalisation, at around 120% of GDP, is among the highest in the G7, behind only the US; and the stock of corporate bonds outstanding has grown rapidly over recent years.[1]

The size of the UK financial services sector is, at least in part, the result of comparative advantage and of a long term historical pathway.  The UK runs a large trade surplus with the rest of the world in financial services, amounting to 3% of GDP, without which the UK current account deficit would be closer to 10% than 5%. 

The financial services sector employs almost 1.1million people.  Its share of employment is a relatively modest 3.2%, but its share of UK value added is much higher at 7.2%, underscoring the UK's comparative advantage in financial services.  On all these metrics, the UK financial services sector is a considerable source of strength to the UK economy.

If we look beneath the surface of these numbers, however, a somewhat different picture of the sector emerges.  This derives from the fact that the UK financial services sector, in practice, comprises not one but two distinct eco-systems: a global eco-system, centred around the City of London which provides global financial services; and a local eco-system, providing services to domestic companies and consumers.  This is not surprising.  The City of London, founded by the Romans, was part of their extended Maritime trade system incorporating Ostia, Piraeus and Marseilles, and was open to the sea, but they built the largest city wall in Europe to protect it from domestic pressures.  Boudicca has not yet been claimed as am early Brexiteer but it is only a matter of time.  From Roman times there were two distinct economic systems, the territorial and the maritime.  The domestic economy was strictly regulated; maritime trade adventurously mercantile. 

The distinction between the formal and the substantive economy or the territorial and maritime economy was a central tenet of classical statecraft.  Ports were placed at a distance from cities, for the sea was not only a place of tempestuous threat and piracy but also of tremendous wealth and speculation.  The returns from the domestic territorial economy were always lower than those built around long distance voyages and insurance.  The basis of the British Empire was the City of London as the hub of a maritime economy that circled the globe every bit as much as Rome was built around the port of Ostia and the control of the Mediterranean.  In terms of the categories developed in the first seminar, maritime trade was based on commodification, in which everything, from people to precious stones, had a price.  In the domestic economy neither human beings nor nature were commodities and the rates of return on investment were thus constrained.[2]  The necessities of life were secured without an exclusive reliance on the price system through a range of local and national measures.[3] 

Politics was the means through which the substance of society was preserved in defiance of commodification.  This was done through legislation.   Democracy has been the route, since classical times, through which poor people could maintain a non-commodity status and exert some constraint on the power of money.  It is significant that the City of London Corporation remains the oldest continuous civic democracy in the world.  As a City from ‘time immemorial’ it is not subordinate to Parliament and has never been required to disclose its assets.  The maritime interest was an important part of the formation of the English and then the British polity, expressed in the primary role of the Navy and the Treasury but it was constrained by Parliament and Royal prerogative as well as by common law and customary practice.  It was urged to keep its attention overseas and not interfere too much in the domestic economy or its politics.  The tension could not hold and there was an explosion in the 1830’s when a combination of enclosures, the abolition of apprenticeship laws, and the Poor Law Reforms meant that the rules of the maritime economy were for the first time enforced on dry land with a free market in people, land and food.  Once again, democratic politics was the means through which this was constrained and refashioned through new labour market and welfare legislation as well the enforced preservation of common lands through parks and commons.  What has become known as municipal socialism was an extraordinary burst of creative energy that both preserved and created civic institutions that defended the non-commodity status of people and land. 

The central point being made is that the rates of return have always been higher in the financial rather than the productive sector, in the maritime rather than the territorial, in the global rather than the national economy and that the pressures of globalisation are not new.  A land-based settled economy is always more sluggish than the mercantile maritime one.  Recent research by both CRESC and the Bank of England indicate that a ‘foundational economy’ made up of 85% of economic activity plods along, more or less impervious to the global demands of relentless innovation and ever higher rates of return.[4]  This is constituted by health, social care, relational support, local services and companies as well as building and maintenance. 

Nothing much has changed in two thousand years.  The global entrepot-hub of the City of London is world-leading and thriving; the domestic and regional financial sector has been starved of sunlight for several decades and does a relatively poor job of supporting domestic households and firms.  It is not an exaggeration to say that the British economy looks like Singapore around London and like Portugal everywhere else. 

These show up in alternative metrics of UK's financial sector health. 

1.  There appear to be distinct limits to the benefits of greater financial depth.  For example, work by the IMF and the Bank for International Settlements has shown that there is an inverted U-shaped relationship between banking sector assets relative to GDP and growth, with oversized banking systems appearing to be damaging to growth.[5]  The peak of this inverted U is found to be around 100% of GDP, putting the UK well into the downslope.  This problem relates to the problems of commodification and financialisation discussed in the first seminar. 

2.  Although the UK has a relatively high market capitalisation, a chunk of this reflects foreign-listed companies.  More fundamentally, the UK stock market is no longer a primary source of market financing for UK companies: more is extracted in stock buybacks than is being raised in IPOs.  The number of IPOs on the UK Stock Exchange is half the number of a couple of decades ago, as is the number of listed companies.  The City of London functions as a global and not a national source of investment. 

3.   Despite the rapid growth and large scale of banks' balance sheets, there has been no discernible improvement in the availability of financing to small to medium-sized UK companies than there was a generation ago.  Perhaps this is also unsurprising.  The fraction of UK banks' balance sheets devoted to financing companies has experienced a secular fall for many decades.  It currently stands at around 7%, having been as high as 20% as recently as 1990.  In the first seminar we noted that in post-war Britain capital has centralised with the same intensity as the state and this has left regions without finance or financial institutions.  The story of Northern Rock is instructive in this regard. 

The Northern Counties Permanent Building Society was established in 1850 in Newcastle.  It was modest in its spending and embedded in the life of the region to the extent that during the Miners’ strike it suspended mortgage payments so they could keep their home.  It was part of the local economy and society, that most precious civic inheritance, a trusted financial institution.  In 1965 it merged with another local institution, the Rock Building Society to become Northern Rock Building Society. 

It demutualised in 1997 and became Northern Rock, which sponsored Newcastle United and became the fifth biggest lender in the UK market.  A mutually owned institution which had partnered its region in good times and bad for a hundred and forty seven years, that had weathered four serious depressions and emerged stronger from each could not last through New Labour’s period in Government.  It was nationalised in 2008 and Newcastle United came to be sponsored by Wonga, a company that began its lending at four thousand per cent at a time when the banks were borrowing at less than three.  It is now sponsored by a Chinese Betting Company and owned by Mike Ashley.  It is understood locally as dispossession and disinheritance. 

This financing problem for SMEs was exposed during the financial crisis, but the problem itself is a long-standing one.  The Macmillan Report of 1931 drew attention to the same issue and it requires a structural response.[6]  Latterly, that problem appears to have been particularly acute among innovative companies and among companies at the scale-up, rather than start-up, stage of the innovation life-cycle. 

4.  Although growth of credit to the household sector has been rapid, largely in order to finance house purchases, it is at least questionable how well-served households are by the banking industry.  Surveys of trust in banks and satisfaction among consumers in financial services tend to score extremely poorly, exacerbated by the financial crisis. 

As with companies, however, these trust and dissatisfaction problems predate the crisis. Some of this may reflect the centralisation of financial decision-making among most banks and, in many cases, their physical disappearance from the high street.  53% of UK bank branches closed between 1989 and 2016.  At the start of the 20th century, there were more then 7000 UK bank branches, with the local bank manager a figure of prestige and standing in the local community.  Whereas once there were small platoons of local lending officers, with institutional autonomy, local relationships and power in their locality, today decision-making is often automated and usually centralised.  Barclays is a case study in this.[7] 

Remarkably, for a country with one of the world's leading global financial centres, there are still around 1.7 million adults in the UK without a bank account.  According to the Citizens Advice Bureau the same number of people are reliant on high-cost, non-bank sources of credit to make ends meet, paying extractive rates of interest.[8]  A recent House of Lords Report highlighted the extent of this financial exclusion among large cohorts and regions of the UK.  51% of 18-24 year olds regularly worry about money; credit ratings have caused financial problems for 1 in 5 young people; and one-third of people over the age of 80 have never used a cash machine or prefer to avoid them.[9] 

Perhaps the most pressing issue for a renewed political economy is how best to reconstitute and renew the locally-focussed, regionally-oriented aspects of the UK's financial services eco-system in order to support investment, productivity and growth.  This has received too little public and policy attention, in part because of the very success of the global eco-system which it is largely detached from.  Supporting the local and regional financial infrastructure need not detract from the successful global bits.  To the contrary, it would help build and maintain support for the global components, which is currently lacking.

It is also the case that productive manufacture is far more complex and demanding than financial services.  It involves the material movement of things, complex supply chains, highly skilled labour and is far more prone to disruption.  The rates of return are lower in production than in global investment.  This partly explains the extraordinary concentration of capital, the oligopoly of the national banks and their lack of resilience, as was revealed in the crash of 2008.

The Brexit vote may be considered wrong and ill-informed from any number of rational and policy based approaches.  It is, however, continuous with a long standing tradition of using democratic politics as a means of asserting some form of political control over the commodification of people and land.  London’s international financial services are a key component of our economy and its continuation does not entail the continued neglect of the domestic economy. 


What is to be done?

The ‘MacMillan Gap’ referred to earlier, in which viable regional businesses could not secure capital because the rates of return in finance were higher and commercial imperatives required the maximum return on investment.  The gap in the early 1930’s were loans between £5,000 and £200,000, the gap now is the range between £250,000 and one million pounds.[10]  The Bank of England established the Bankers Industrial Development Company in 1930 to serve large industry, predominantly, coal, iron and steel.  In 1945, the Industrial and Commercial Finance Corporation was established with a distinct mission to lend to small and medium businesses.  It ‘provided a national service at no cost to the taxpayer and a substantial return to its shareholders’.[11]  As a self-governing corporation, with a specific purpose, and accountable to the Bank of England, it was remarkably successful.  It fell foul of the fact that as neither a state directed nor a private company, it should not have been successful at all.  It was rebranded and then privatised in 1987 as 3i, a private limited company focusing on buyouts rather than loans.  During the thirty years after the war it established strong long-term regional and sectoral relationships.[12]

As well as the depletion of an institutional eco-system for industrial investment for SME’s, there has also been a decimation of the institutions required for household and personal loans.  This was exacerbated in the credit crunch.  None of the building societies that were demutualised in the 80’s and 90’s are autonomous institutions.  Northern Rock is perhaps the worst example of regional institutional malnutrition but it is part of a general trend. 

What is required is the endowment of two autonomous corporations, regulated by and accountable to the Bank of England, established in each city and county of the UK.  This would complement a new federal political settlement.  It would have two functions:

a.     The Industrial and Commercial Finance Corporation function of investing in regional SMEs, with targeted regional sub-funds with weights inversely related to regional GDP.  These would be embedded in the foundational economy.  It could establish city and county stock exchanges as a means of strengthening local access to capital and regional markets.  It would also champion environmental technology as an alternative to a centralised green new deal. 

b.     The building society or local bank function of reconstituting relational and low cost personal loans as an alternative to pay day loaners. 

There are various alternatives which could be considered when it comes to the endowment and financing of new civic financial corporations.  They could be discrete or complementary.  It would be a very British form of a Sovereign Wealth Fund.  A shared asset that underpins the financial stability of the nation. 

1.     10% of the total cost of the bailout would provide a substantial endowment, paid for by the banks and redistributed in the form of a shared asset to the cities and counties of the country.  The National Audit Office claim that the cost of the bailout to the state was £1.162 trillion, and it is worth mentioning that in Britain a trillion is a thousand billion.  100 billion pounds would be an adequate endowment and match the scale of the lack of capital and investment in the towns and counties. 

2.     It could also be partially financed by pooling local authority pension funds and supplementing it with an endowment from pension funds and insurance companies. 

3.     Establish an incentive to invest in the fund through a tax free ISA, perhaps with a regional component. 

The corporate governance of the institution would include the Bank of England, representing the asset as well as core anchor institutions from the city or county such as Churches, Mosques, Universities and hospitals as well as the workforce to provide a balance of interests and a responsiveness to local needs. 

The legislative supplement to the institutional reform of banking could be:

a.  - different governance rules for private financial firms, which better recognise their wider public interest role and the interests of customers, depositors and borrowers.

b. - a basic bank account model, with very low costs, which is a requirement for any government payment.  That could be pioneered by these Banks of England, which becomes the bank of choice for state transfers.

c.  -require data-pooling on companies/customers, to facilitate market access by new entrants.

The establishment of a new civic ecology, which is not dominated by neither the demands of capital nor the state, and is built around an embedded self-governing corporation with a specific purpose to fill the gaps highlighted by the 2008 crash, would be consistent with the practices and principles of Common Good Economics developed in this seminar series.  These include the rediscovery of place, institutions and tradition in a renewed political economy that encourages markets in real commodities but not in the commodity fictions of labour, land and money.  By encouraging long term relationships with SME businesses in particular places it creates incentives to virtue.  It complements the vocational institutional reform which will be the subject of the next seminar. 


[1] We would like to thank Shiv Chowla for providing the statistics for this this paper. 

[2] For a far more detailed analysis of the dual economies of Athens and Rome see M. Glasman, Landed and Maritime Markets in Ancient Rome: The Polanyi Paradigm Reconsidered. 

[3] An excellent analysis of the different types of economy that makes this distinction between formal and substantive through the idea of a foundational economy of material and providential goods is made in ‘Building foundational Britain: from paradigm shift to new political practice’ by Luca Calafati, Julie Froud, Sukhdev Johal and Karel Williams, in Renewal, 2019. 

[4] See Karel Williams, et al, The End of the Experiment?  From Competition to the Foundational Economy, Manchester University Press, 2014.  See also, Productivity puzzles, Speech given by Andrew G Haldane, Chief Economist, Bank of England, London School of Economics, 20 March 2017.

[5] For the U-shaped concept see, Jean-Louis Arcand, Enrico Berkes and Ugo Panizza, 'Too much finance?' in Journal of Economic Growth, Vol. 20, No. 2, pp. 105-148.  2015. 

[6]  The Report of the Committee of Finance and Industry, June, 1931.  It is worth noting that while Harold MacMillan was chair, Keynes and Ernest Bevin were active members of the committee.  For a long term perspective on this see, Raymond Frost, ‘The MacMillan Gap’, Oxford Economic Papers, 1954, 6 (2): pp. 181-201.  The MacMillan Gap refers to the lack of investment in small and medium sized business.  In Germany this is known as the Mittelstand and their sectoral and local banking arrangements are of great interest. 

[7] See Margaret Ackrill and Leslie Hannah, Barclays: The Business of Banking, Cambridge University Press, 2001.  Pp. 320-360. 

[8]   Citizens Advice Bureau, Payday Loans: An improved Market? Overview of the trends in the Payday Loans Market.  March 2016

[9]  See

[10] David Merlin-Jones, The Industrial and Commercial Finance Corporation: Lessons from the past for the future, Civitas, 2010.  P. 3. 

[11] R. Coopey and D. Clarke, Fifty Years Investing in Industry, 1995.  P.376. 

[12] Dr. Mark Hayes, who is unfortunately too ill to attend this seminar, worked for the ICFC and we wish to thank him for bringing this to our central attention and wish him a full recovery.