Miliband may be on to something. The UK’s SMEs may wish for banks like Germany’s

14th March 2013

The Labour leader Ed Miliband is seeking to put pressure on the Chancellor George Osborne by saying he would establish regional banks to lend to small business as the BBC reports here.

The Labour opposition have already put together plans for a national investment bank but this adds a significant new dimension to the plans. Miliband wants German-style regional banks to help end what he calls the ‘bonus as usual’ culture of the big banks and boost British business. Miliband chose to make the speech to the British Chambers of Commerce.

Left-leaning magazine the New Statesman has applauded the speech saying it adds more to the blank sheet of paper, as the Prime Minister David Cameron recently described the Labour Party’s economic policy.

The magazine says Labour is a particular fan of the Sparkassen, locally managed and local authority owned German banks, which it says have a duty to promote growth in economically underdeveloped regions, though there is no suggestion that Miliband’s banks would only be sited in England’s underdeveloped regions. It also begs the question would future Labour administrations in Wales and Scotland embrace the idea?

In the Guardian, Tony Greenham from thinktank the New Economics Foundation is firmly in support and suggests that troubled state-owned bank RBS could be broken up to create these regional Sparkassen.

But is it all good news for German banking? Many supposedly staid German banks including state or Landesbanks played their full part in the financial crisis. While they were certainly not guilty of lending recklessly within Germany, many participated in investments in mortgage backed securities across the globe, the financial instruments which helped precipitate the financial crisis.

They also lent very freely to Europe’s periphery, which is one reason why German banks have a lot of skin in the game when it comes to the eurozone. German loans of one sort or another to the Eurozone may be Euro 2.8 trillion bigger than German GDP.

And this recent article in Ft.com, shows German banks face an intriguing dilemma. The Bundesbank has warned German banks about over-reliance on German firms, particularly the Mittelstand, Germany’s hugely successful manufacturing sector of medium sized businesses.

But such lending also offers very low margins. Add in 430 local savings banks and 1,200 cooperative banks potentially offering loans and this means bank lending margins are lower than almost everywhere else in the world though to a very successful sector. Such low margins may have played a part in German banks seeking margins overseas. This all takes us back to the financial crisis.

The Landesbanks are not Sparkassen of course and actually we don’t know what sort of banks Miliband wants. Simply divide RBS into six banks across the UK, and it feels like they are at the larger end of the scale and maybe not therefore local enough.

There is clearly a lot of work to be done on the small. But financial crisis mistakes aside which we have here too, consider the problems for German banks and transpose them to Britain. Not high enough margin for the banks and over-reliance on a flourishing domestic industrial sector. Maybe Miliband is on to something.

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