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A programme for regeneration: A practical look at the UK economy for the concerned citizen – Part One

Banks & Decentralisation

The City of London has long been a virtually independent country within England.  It even said to have made a deal with William the Conqueror: “Don’t interfere with us and we will lend you money.” It was at the centre of the expansion of the British Empire and the defeat of Napoleon, Kaiser Bill and Hitler.  But since the 1986 loosening of controls that has gone: or has it?

It remains the main international money centre in the World, owing to its extremely loose regulation. When the law is broken, nobody goes to prison. Just a slap on the hand to company concerned.

Despite the experience of 2008  and the massive financial collapse UK banks are still allowed to speculate with customers money. This is something that was banned in the USA until the abolition of the Glass Steagall Act.  The crash happened soon after wiping out billions that the US and UK tax payer had to pick up.

The Speri-report (see part 2) describes how this historical hang-over is distorting the UK economy. Can this situation be rectified without doing the virtually economically and politically  impossible of closing down the City?

Obviously we need a massive reform of the tax system, starting with the banning of offshore banking.  But in the meantime we can tackle the problem from a different angle.

Local Banks and the German system

After World War 2, the British imposed a localised banking system on the Germans to insure it did not compete with the City of London. Much of the German banking was already based on localised banking.

The German system has served Germany well.  German savings are re-invested back into Germany for the most part.  The UK banking system evolved to serve the UK economy and its empire, but ceased to do so almost completely after the de-regulation of 1986.  Britain’s decline as an industrial nation was accelerated massively during the 1980s and has continued since.

The Germans have nearly 1800 different banks.  Strong decentralisation. There are three main types:

200 private banks, the best known being the US controlled Deutsch Bank of infamous memory. (The Big Short)

400 publicly owned savings banks.

1,100 member-owned Credit Unions.

Credit Unions

Credit unions, a German invention, have their origins in the 19th century. A pioneer called Wilhelm Raiffesen help start them to enable farmers escape the clutches of loan-sharks after a series of bad harvests.  Some credit unions are still called Raffeseinbanken. Members have a say in how the credit banks are run.  There are also co-operative banks serving sectors of the economy such as Apobank which serves pharmacists and doctors. Around 18 million Germans belong to Credit Unions.

Recently over 1000 have rationalised into one single national co-operative called the DZ bank, a single insurer, R@&V, a single asset manager, Union Investment and a single mortgage bank, Schwabisch Hall.

Savings Banks

Savings banks and credit unions have mandates that emphasize  maximising the welfare of members rather than making a profit. Thus profits from a savings bank are given to the municipality that owns it. They also sponsor local festivals, hospitals and universities.

Whenever the above have strayed beyond their remit and invested internationally they get their fingers burnt.  There should obviously be a legal limit on this activity.

The Savings Banks have rationalised their businesses by creating eight regional mortgage banks, eleven insurers, and one asset manager, Dekabank.

This is a model that the UK has to take into account if it wishes to develop a banking system that works for the UK instead of the international market.

The UK financial and banking system is historically an international one. It plays very little role in developing the UK economy except employing around 300,000 people. With AI many of these jobs will disappear as will many that are destroyed by the next financial crisis.

But AI is also an opportunity to decentralise banking.

The City of London needs to be separated from UK domestic banking and the latter should be expanded to serve businesses and the people, not the international speculation market.

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